RAILROAD 


VALUATION  AND  RATES 


BY 


MARK    WYMOND 


WYMOND  &  CLARK 

RAND-MCNALLY    BUILDING 

CHICAGO 
1916 


Copyright   1916 

By 
MARK  WYMOND 


Press  of  the 

Drovers  Journal  Publishing  Co. 
Chicago 


FOREWORD 

This  book  is  intended  primarily  as  a  treatise  on 
the  Principles  of  Rates  and  their  relation  to  Valua- 
tion and  Rate  Regulation.  In  view  of  this  fact,  the 
reader  is  entitled  to  an  explanation  of  why  the  first 
four  chapters  are  devoted  to  what  at  first  sight  seem 
unrelated  subjects. 

No  discussion  in  regard  to  the  proper  basis  for 
rate-making  can  last  very  long  without  reference  to 
Capitalization  and  Valuation.  The  discussion  on 
capitalization  finally  turns  on  the  abuses  practiced 
in  the  construction  and  promotion  of  railroads.  Pro- 
motion and  construction  are  most  intimately  con- 
nected with  capitalization — in  fact,  very  much  more 
so  than  capitalization  is  with  rate-making. 

There  is  seemingly  some  confusion  on  the  part  of 
some  authors  and  publicists  in  regard  to  the  facts 
concerning  and  the  conditions  surrounding  the  pro- 
motion and  construction  of  our  railroads  and  the 
relation  which  such  facts  and  conditions  have  to 
capitalization.  Many  of  us  have  come  to  accept 
these  widely  published  interpretation  of  facts  for 
the  facts  themselves,  generally  because  we  do  not 
take  the  time  to  make  the  investigation  necessary 
to  determine  their  accuracy. 

The  general  impression  one  gets  from  much  of 
the  discussion  and  criticism  of  the  railroad  situation 


6  VALUATION  AND  RATES 

is,  that  the  original  promoters  of  railroads  have  in- 
variably reaped  enormous,  and  hence  unearned, 
rewards ;  that  the  construction  of  the  roads  has  been 
attended  invariably  by  fraud  and  that  the  most  of 
the  original  capitalization,  and  all  of  the  increases 
in  the  last  twenty  years,  represent  only  the  "nerve" 
of  the  financier  in  injecting  water  into  railroad  se- 
curities. 

There  are  undoubtedly  many  well-authenticated 
instances  in  which  the  conditions  recited  are  true, 
but  we  are  inclined  to  judge  a  whole  class  of  individ- 
uals or  all  members  engaged  in  some  line  of  business 
or  industry  by  the  actions  of  only  a  few  of  them,  for- 
getting that  these  are  not  representative  of  the  mass. 

We  have  seen,  in  some  instances,  that  editors  of 
important  publications  and  professors  of  our  uni- 
versities, who  lead  public  opinion,  have  said  or  done 
very  foolish  things,  yet  we  regard  these  professions 
with  respect  and  believe  that  as  a  class  they  are  in- 
telligent and  well-informed  men.  Ministers  and 
priests  have  broken  their  vows;  lawyers  have  been 
unfaithful  to  the  interests  of  their  clients;  doctors 
have  violated  confidence  reposed  in  them;  and  yet 
as  a  class  we  regard  the  minister,  priest,  lawyer  and 
doctor  more  highly  than  we  do  other  classes  of  men, 
and  because  as  a  class  they  are  worthy  of  our  regard 
and  confidence,  irrespective  of  what  individual  mem- 
bers of  their  professions  may  have  done.  Our  judg- 
ment is  based  on  the  normal  and  usual  things — not 
on  the  extraordinary  and  abnormal. 

For  these  reasons  it  has  appeared  to  the  author 
that  a  historical  statement  of  the  facts  regarding 
these  matters,  in  so  far  as  they  have  a  bearing  on  the 
main  subject,  would  assist  in  obtaining  a  better  un- 
derstanding of  them  and  their  relation  to  our  sub- 
ject. This  statement  will  be  brief  and  confined  only 


FOREWORD  7 

to  those  prominent  features  of  interest  in  the  con- 
nection named. 

No  one  man  can,  from  his  own  experience,  speak 
with  final  authority  on  all  of  the  many  sides  of  rail- 
road affairs.  If  he  is  to  write  for  the  purpose  of  in- 
forming those  unfamiliar  with  the  detail  of  railroad 
work  and  its  problems,  he  should,  however,  have 
been  in  actual  contact  with  some  of  them,  in  order 
that  he  have  a  basis  of  practical  experience  on  which 
to  form  his  judgment  as  to  what  are  essential  facts 
and  their  relation  to  each  other. 

All  of  us,  even  when  we  attempt  to  be  thoroughly 
honest  with  ourselves  and  with  others,  are  uncon- 
sciously biased  by  our  environment  and  service.  The 
reader  of  a  book  which  discusses  subjects  on  which 
there  is  such  diversity  of  opinion  as  exists  at  the 
present  time  as  to  railroad  matters,  is  entitled  to 
know  the  bias  of  any  one  who  assumes  to  inform 
him. 

The  writer  has  had  some  thirty  years  experience 
in  connection  with  the  promotion,  construction,  re- 
construction, operation  and  valuation  of  railroads,  as 
an  engineer  in  the  service  of  railroad  corporations; 
of  banking  institutions,  financing  or  investigating 
their  operation,  organization  or  physical  property; 
of  local  communities  and  of  industrial  or  mining  cor- 
porations seeking  to  better  existing  or  procuring  new 
transportation  facilities;  of  a  traffic  association  in 
special  freight  rate  work.  In  addition  he  has  in- 
vestigated specifically  the  rate  structures  of  certain 
important  traffic  territories  and  published  traffic 
maps,  showing  graphically  their  rate  adjustments, for 
the  information  and  use  of  the  traffic  officials  of  the 
larger  commercial  and  industrial  corporations  and 
railroads.  It  is  hoped  that  this  experience,  in  such 
diversity  of  service,  may  give  some  assurance  to  the 


8  VALUATION  AND  RATES 

reader  of  his  impartial  attitude  in  making  the  state- 
ments of  what  he  believes  to  be  the  essential  facts 
and  their  proper  interpretation  and  relation  to  each 
other. 

The  book  may  be  considered  as  being  divided  into 
two  broad  divisions  of  Historical  fact  and  a  discus- 
sion of  the  Principles  of  Rates.  The  first  four  chap- 
ters, namely,  Historical,  Promotion,  Construction — 
Reconstruction  and  Capitalization,  are  descriptive 
and  historical.  The  others,  on  Valuation  and  Rates, 
are  devoted  to  the  various  phases  of  those  subjects. 


HISTORICAL 

Railoads  are  the  legal  and  actual  successors  of 
the  older  turnpikes  and  canals.  The  invention  of 
MacAdam  in  the  early  part  of  the  Nineteenth  Cen- 
tury was  responsible  for  the  turnpikes,  which  cheap- 
ened the  cost  of  transportation  through  providing  a 
good  solid  road  for  team  traffic  at  all  times. 

Francis,  in  his  "History  of  the  English  Railways/' 
states :  "In  the  Seventeenth  Century  the  charge  for 
conveyance  amounted  in  many  cases  to  a  prohibi- 
tion. Heavy  goods  cost  from  London  to  Birmingham 
7£  a  ton,  from  London  to  Exeter  12£  were  paid. 
Coal  was  rarely  seen  save  in  the  neighborhood  which 
produced  it."  An  advertisement  of  the  York  and 
London  Stage  Coach  in  1706  promised  to  be  in  Lon- 
don on  the  fifth  day  out  of  York  and  to  run  from 
London  to  York  in  four  days. 

The  history  of  the  pre-railroad  era  serves  to  em- 
phasize the  fact  that  transportation  facilities  are 
absolutely  essential  to  an  extensive  commerce,  and 
that  the  present  traffic  of  the  railroads  is  made  up 
in  greater  part,  not  of  the  transportation  of  com- 
merce existing  at  the  time  of  their  construction,  but 
of  that  part  of  it  which  the  transportation  facilities 
themselves  have  made  possible. 

The  canals,  which  were  the  first  systems  of  trans- 
portation, were  intended,  and  from  their  nature 
could  be  used  only  for  the  transportation  of  bulky 
and  low-priced  commodities.  The  time  required  for 
transportation  precluded  their  use  for  the  carrying 
of  ordinary  merchandise  of  comparatively  high  value 
now  moved  by  the  railroads  under  merchandise  tar- 
iffs. The  business  on  the  turnpikes  consisted  chiefly 
of  carrying  this  latter  class  of  traffic,  the  transporta- 


10  VALUATION  AND  RATES 

tion  of  which  required  greater  speed  than  was  pos- 
sible on  the  canals.  The  rates  charged  for  carrying 
such  traffic  too  were  very  much  higher  than  those  de- 
manded for  the  bulky  commodities. 

The  railroads,  therefore,  in  their  earlier  history, 
competed  with  the  canals,  which  carried  bulky 
freight  at  low  rates,  on  the  one  hand,  and  the  turn- 
pikes, which  carried  higher  class  traffic  at  much 
higher  rates,  on  the  other. 

Development  of  the  Steam  Railroad 

Rails  were  first  used  in  the  coal  mines  of  England 
during  the  Seventeenth  Century  to  facilitate  the 
handling  of  the  cars  used  in  carrying  coal  from  the 
working  to  and  from  the  mouth  of  the  pits.  These 
rails  were  first  of  wood,  laid  flat  upon  the  ground 
or  supported  by  stones  or  other  device.  In  1767 
cast  iron  rails  were  first  used  as  a  substitute  for 
these  wooden  rails. 

The  first  railroads  used  generally  by  the  public 
for  the  transportation  of  passengers  and  freight 
were  laid  in  the  turnpikes.  The  track  consisted  of 
two  plain  strap  rails,  laid  level  with  the  surface  of 
the  road.  The  railroad  company  provided  only  this 
rail  for  the  use  of  the  carrier,  who  supplied  his  own 
vehicles  and  teams  for  moving  it. 

The  next  development  was  a  rail  with  a  flange 
turned  up  to  confine  the  wheels  to  the  rail.  In  the 
last  and  final  development,  as  to  general  design,  the 
flange  was  placed  on  the  wheel  instead  of  the  rail, 
which  necessitated  the  raising  of  the  rail  above  the 
surface  of  the  road. 

As  such  construction  affected  the  operation  of  the 
turnpikes  by  the  teams  not  using  the  rails,  and  as 
the  operation  of  the  vehicles  over  the  rails  laid  in 
the  turnpikes  necessitated  very  sharp  turns  and 


HISTORICAL  11 

steep  grades  in  following  the  contour  of  the  country, 
the  separation  of  the  rail  traffic  from  the  team  traffic 
was  suggested,  which  required  a  right  of  way  de- 
voted to  the  rail  traffic  only,  and  of  the  construction 
of  the  embankments  and  excavations,  to  avoid  the 
expense  of  ascending  and  descending  the  hills. 

The  construction  of  the  embankments  required 
the  building  of  bridges  across  the  streams,  and  other 
forms  of  construction  as  we  see  them  now  on  the 
railroads.  This  last  development  was  brought  about 
by  the  invention  of  a  practical  steem  engine  which 
could  be  operated  over  the  railroad. 

Modern  railroads  owe  their  origin  to  George  Ste- 
phenson,  the  builder  of  the  first  practicable  steam 
engine  for  the  Stockton  and  Darlington  Railway, 
originally  operated  as  a  horse  railway,  and  which 
in  1823  was  authorized  to  use  steam  for  tractive 
purposes.  This  experiment  proved  the  practicabil- 
ity of  moving  people  and  commodities  economically 
and  the  enterprise  was  a  financial  success  for  its 
promoters. 

The  first  railroad,  after  the  invention  of  the  steam 
engine,  charged  one  rate  for  the  cost  of  carriage  and 
another  entirely  separate  rate  for  the  use  of  the 
road  alone.  This  will  be  understood  from  the  copy 
of  the  original  tariff*  of  one  of  them  which  follows : 

Tonnage  Rates  Per  ton 

(For  use  of  road  only)  per  mile 

s       d 

For  all  limestone 0       1 

For  all  coal,  lime,  dung,  compost,  manure  and 

material  for  roads 1.5 

For  all  coke,  culm,  charcoal,  cinders,  stones, 
sand,  clay,  building,  paving  and  pitching 
*From  Acworth's  "Elements  of  Railway  Econom- 


12  VALUATION  AND  RATES 

s       d 
stones,  flags,  bricks,  tiles  and  slates 0       2 

For  all  sugar,  corn,  grain,  flour,  dye  woods, 
timber,  staves,  deals,  lead,  iron  and  other 
metals 2.5 

For  all  cotton  and  other  wool,  hides,  drugs, 
manufactured  goods,  and  all  other  wares, 
merchandise,  matters  and  things 0  3 

Passenger  Rates 

For  every  person  traveling  thereon  not  more 

than  10  miles,  in  any  vehicle 1       6 

For  ditto,  exceeding  10  miles  but  not  above 

20 2       6 

For  ditto,  above  20  miles 4       0 

For  every  horse,  mule,  ass,  or  other  beast  of 
draught  or  burden,  and  for  every  ox,  cow, 
bull  or  neat  cattle  carried  in  or  on  such 

carriage,  not  exceeding  15  miles 2       6 

For  ditto,  exceeding  15  miles 4       0 

For  every  calf,  sheep,  lamb  or  pig,  any  dis- 
tance    0  9 

Per  ton 

Carriage  Rates  per  mile 

s       d 

For  all  lime,  limestone,  dung,  compost,  ma- 
nure and  materials  for  roads,  stone,  sand, 
clay,  building,  pitching  and  paving  stones, 
tiles,  slates,  timber,  staves  and  deals 8  0 

For  all  sugar,  corn,  grain,  flour,  dye-woods, 

lead,  iron  and  other  metals 9       0 

For  all  cotton  and  other  wools,  hides,  drugs, 

groceries,  and  manufactured  goods 11       0 

For  all  wines,  spirits,  vitriol,  glass  and  other 

hazardous  goods 14       0 

For  all  coal,  coke,  culm,  charcoal  and  cinders          2J 

For  all  persons,  cattle  and  other  animals,  such 
rates  as  the  company  may  decide  upon. 


HISTORICAL  13 

It  will  be  noted  from  the  tariff,  which  was  among 
the  first  actually  used,  that  the  railroads  recognized 
from  the  beginning  that  competition,  rather  than 
cost  of  service,  controlled  the  rates.  They  com- 
peted with  the  turnpikes  for  passenger  and  high- 
class  merchandise  traffic  at  high  rates,  and  with 
the  canals  for  the  slow,  bulky  freight  at  very  much 
lower  rates.  The  principle  thus  established  has 
been  in  effect  ever  since,  not  only  on  English  rail- 
roads, but  on  those  of  all  countries.  It  is  mentioned 
here  merely  to  show  the  circumstances  which  were 
responsible  for  it. 


First  Railways  in  the  United  States 

The  Mohawk  and  Hudson  Railroad,  now  part  of 
the  New  York  Central  Lines,  started  its  construction 
in  1825;  the  survey  of  a  railroad  from  Boston  to 
Albany  was  begun  in  1829;  in  1830-31  the  Boston 
and  Worcester  and  the  Boston  and  Providence  were 
started;  work  was  begun  on  the  construction  of  a 
line  from  Boston  to  New  York  in  1832 ;  construction 
of  the  Camden  and  Amboy  Railroad,  in  Pennsyl- 
vania, was  started  in  1827 ;  the  Baltimore  and  Ohio 
started  its  construction  in  Maryland  in  1828. 

These  railways  were  naturally  built  through  dis- 
tricts of  the  greatest  density  of  population.  They 
were  begun  at  the  Atlantic  seaports  and  built  inland 
to  those  points  which  had  been  developed  more  or 
less  by  the  transportation  provided  by  the  canals 
or  other  water  courses  and  turnpikes. 

The  following  table  shows  the  growth  of  the  rail- 
roads in  the  United  States  from  1828  to  1914,  both 
as  to  absolute  mileage  and  the  average  annual  in- 
creases in  miles. 


14  VALUATION  AND  RATES 

Mileage  of  Railroads  in  the  United  States 

Average  annual 
Mileage  increase 

in  Miles 

1828.. 3  

1830 41  19 

1840 2,200  216 

1850 7,500  530 

1860 29,000  2,150 

1870 49,000  2,000 

1880 93,671  4,467 

1890 163,597  6,992 

1900 193,346  2,975 

1910 240,439  4,709 

1914 252,231  2,948 

The  construction  of  new  railways  in  the  United 
States,  from  the  beginning  in  1825  to  the  present 
time,  has  been  limited  only  by  the  capital  available 
for  the  purpose.  The  immense  area  extending  from 
the  Atlantic  Ocean  to  the  Great  Plains,  and  for  some 
distance  eastward  from  the  Pacific,  had  a  favorable 
climate,  fertile  soil,  virgin  forests  and  valuable  min- 
eral deposits,  in  immense  quantities ;  in  much  of  the 
intervening  mountainous  region  the  most  valuable 
deposits  of  precious  metals  in  the  world  were  known 
to  exist.  Under  these  conditions  it  was  clear,  even 
in  the  earlier  days,  that  the  transportation  of  goods, 
and  the  products  of  farm,  forest  and  mine,  even 
in  undeveloped  territory,  would  pay  for  its  cost,  the 
interest  on  the  required  investments  and  a  profit  to 
the  investor.  What  disappointments  there  were  in 
connection  with  such  enterprises  occurred  mainly 
through  lack  of  capital  to  complete  them  and  the 
failure  to  realize  that  time  was  a  large  factor  in  the 
transaction — that  even  with  such  great  potential 
wealth,  it  required  time  for  converting  it  into  actual 


HISTORICAL  15 

usable  wealth  and  some  financial  provision  for  the 
lean  years  of  the  development  period. 

The  domestic  capital  available  for  constructing 
railroads  was  limited.  It  was  derived  chiefly  from 
the  shipping  interests  and  the  sudden  rise  of  the 
cotton  industry,  which  occurred  at  this  time.  In 
1833  the  removal  of  $29,000,000  of  government 
deposits  from  the  United  States  Bank  to  state  in- 
stitutions, and  the  distribution  of  the  government 
surplus  among  the  states,  after  the  final  extinction 
of  the  national  debt  in  1835,  made  available  an  in- 
creased capital  for  railroad  construction  purposes. 

Basis  for  Financing: 

The  first  railroads  in  the  eastern  states  were  con- 
structed with  funds  obtained  by  subscriptions  to 
capital  stock,  no  bonds  being  issued.  This  plan  an- 
swered very  well  in  territory  already  developed,  but 
not  in  undeveloped  territory,  for  the  reason  that  the 
returns  on  investments  could  not  be  immediate.  In 
that  portion  of  the  eastern  states  in  which  the  rail- 
roads connected  the  larger  towns  and  traversed 
manufacturing  districts,  the  traffic  for  the  railroad 
was  provided  in  advance  of  its  construction.  The 
subscription  to  the  stock  of  such  a  railroad  was 
therefore  a  well  insured  investment,  but  in  the  un- 
developed territory,  where  the  railroad  had  to  create 
its  own  traffic,  an  investment  in  its  stock  was  neces- 
sarily speculative. 

The  original  stock  subscription  had  called  for  8% 
on  the  whole  investment.  It  is  apparent  that  this 
stock  subscription  plan  for  raising  capital  failed  to 
use  the  possible  credit  of  the  railroad  to  its  fullest 
extent.  To  extend  its  borrowing  capacity,  a  plan 
was  devised  for  dividing  the  capital  of  the  railroad 
into  two  distinct  parts: 


16  VALUATION  AND  RATES 

First,  bonds,  on  a  loan  basis  of  6%,  secured  by 
the  physical  property  and  franchises  of  the  railroad ; 
second,  stock,  which  was  unsecured  by  physical 
property  but  which  had  an  interest  in  the  profits  of 
the  operation  of  the  enterprise.  In  order  that  this 
form  of  financing  should  be  as  remunerative  to  the 
investor  as  the  former  8%  subscription  shares,  a 
bonus  of  the  stock  was  given  with  the  bonds  to  stim- 
ulate investment.  This  made  the  bondholder,  both 
the  creditor  as  to  the  cost  of  the  physical  property 
and  a  partner  in  the  anticipated  profits  of  the  enter- 
prise. This  plan  used  to  the  fullest  extent  the  credit 
of  the  enterprise  and  made  feasible  much  construc- 
tion not  otherwise  possible. 

From  the  first,  the  legislatures  of  the  various 
states,  appreciating  the  many  material  advantages 
to  be  gained  through  improved  transportation  facil- 
ities, voted  aid  directly  to  such  enterprises  by  way 
of  subsidies,  or  by  purchase  or  guarantee  of  the 
bonds  of  the  constructing  companies.  This  was 
supplemented  in  many  instances  by  county  and  city 
aid.  Prior  to  1890  this  was  a  very  common  prac- 
tice ;  since  that  time  most  of  the  states  have  enacted 
legislation  forbidding  the  voting  of  aid  by  the  people 
of  the  state,  counties,  or  municipalities  for  the  con- 
struction of  new  railroads. 

Foreign  Investments  in  United  States  Railroads 

Construction  of  railroads  had  proved  profitable  in 
England,  where  land  was  high  priced  and  labor  in 
consequence  cheap.  Land  in  the  United  States  was 
very  cheap  and  its  potential  wealth  in  fertility  of 
soil  and  minerals  was  known  to  be  great.  Land  in 
England  to  be  used  for  railroad  purposes  had  to  be 
obtained  by  individual  bargaining  and  its  cost  had 
been  great.  The  Act  of  Eminent  Domain  in  the 
United  States  provided  a  means  for  condemning  re- 


HISTORICAL  17 

quired  land  for  railroad  use,  which  made  its  acquisi- 
tion comparatively  easy  and  cheap.  This  one  item 
of  real  estate  alone  explains  in  large  part  the  great 
difference  in  cost  per  mile  of  English  railroads,  aver- 
aging $200,000,  and  roads  in  the  United  States  aver- 
aging now  for  the  whole  country  approximately 
$55,000  per  mile — a  little  more  than  27%  of  the 
cost  of  English  railroads. 

During  the  period  between  1815-1830  the  United 
States  paid  125  millions  of  its  bonds  and  had  extin- 
guished its  entire  national  debt  by  1835,  thereby 
strengthening  its  credit  abroad.  These  were  the 
fundamental  conditions  which  caused  the  large  Eng- 
lish and  European  investments  in  securities  of  United 
States  railways  and  stimulated  their  construction. 
This  source  of  supply  of  capital  was  restricted  by 
the  panic  of  1837,  at  least  as  to  the  railroads  west 
of  the  Allegheny  Mountains.  The  discovery  of  gold 
in  California  in  1849  renewed  it  and  it  continued 
until  the  panic  of  1873.  Foreign  capital  was  again 
invested  in  large  amounts  between  1878  and  1892 
and  was  responsible  to  a  large  extent  for  the  extra- 
ordinary activity  in  railway  construction  during  the 
period  1880-1890.  The  amount  of  foreign  capital 
invested  in  the  shares  of  United  States  railways  in 
the  period  1890-1896  and  the  decrease  in  the  amount 
between  1896  and  1905  is  shown  by  the  following 
tabulation : 

Per  Cent  of 
Foreign  Stock 
*  1890-96     1905 

Illinois  Central 65  21 

Pennsylvania 52  19 

Louisville  &  Nashville 75  7 

New  York,  Ontario  &  Western  58  12 

*Ripley's  "Railroads — Finance  and  Organization" 


18  VALUATION  AND  RATES 

N.  Y.  Central  &  Hudson  River  37  9 

Reading 52  3 

Great  Northern 33  2 

Baltimore  &  Ohio 21  17 

Chicago,  Milwaukee  &  St.  Paul  21  6 

The  foreign  bond  holdings  were  probably  a  larger 
percentage  of  the  total  than  in  the  case  of  stock. 

The  following  is  a  statement  compiled  by  Mr.  L. 
F.  Loree,  President  of  the  Delaware  &  Hudson  Com- 
pany between  October,  1914,  and  April,  1915,  which 
shows  a  summary  of  United  States  railroad  securi- 
ties held  abroad: 

Preferred  Stock,  First $    161,281,000 

Preferred  Stock,  Second 100,000 

Common  Stock 633,802,000 

Notes   61,376,000 

Debenture  Bonds 204,005,000 

Collateral  Trust  Bonds 227,610,000 

Mortgage  Bonds 1,269,057,000 

Equipment  Bonds 17,364,000 

Car  Trusts 808,000 

Receivers'  Certificates 998,000 


Total $2,576,401,000 

Number  of  roads  requested  to  furnish  infor- 
mation      145 

Number  of  roads  having  securities  abroad .    100 

Number    of   roads   not   having    securities 
abroad 36 

Number  of  roads  not  reporting 9 

Causes  of  Increased  Railroad  Construction 

The  territory  comprised  within  the  grain-growing 
areas  in  the  north  central  states  and  at  least  as  far 


HISTORICAL  19 

west  as  the  Missouri  River,  had  been  very  generally 
settled  up  by  the  early  '70s.  The  production  of 
grain  at  this  time  vastly  exceeded  the  needs  of  these 
communities,  but  the  cost  of  transporting  the  surplus 
to  the  eastern  states  and  the  Atlantic  ports  for  ex- 
port was  prohibitive  at  the  rates  then  current,  on 
account  of  the  long  haul  involved.  The  business  of 
the  railroads  serving  this  territory,  generally  known 
as  "grangers,"  was  unprofitable  and  in  a  bad  way 
financially  at  this  time.  It  was  during  this  period 
that  the  price  of  corn  was  so  low  in  some  of  the 
states  within  this  area  that  it  was  used  as  fuel.  It 
was  perceived  by  the  railroads*  that  a  large  tonnage 
at  the  low  rate  was  more  profitable  on  the  whole 
than  a  very  much  smaller  tonnage  at  a  high  rate. 
The  rates  on  all  grains  and  other  agricultural  prod- 
ucts were  readjusted  and  reduced  to  such  an  extent 
that  the  surplus  of  these  commodities  could  be  prof- 
itably hauled  to  distant  markets  in  the  east  and 
much  of  it  sent  abroad.  The  adoption  of  this  policy 
was  responsible  for  the  prosperity  of  the  "granger" 
roads,  which  immediately  followed  the  reduction  in 
grain  rates.  Providing  a  market  for  this  surplus 
made  it  profitable  to  extend  the  area  of  agricultural 
operation  in  producing  more  grain,  involving  the 
construction  of  extensions  of  the  existing  railroads. 

The  general  effect  of  this  circumstance  is  to  be 
observed  in  the  activity  of  railroad  construction 
which  prevailed  between  the  years  1878  and  1890. 
The  density  of  traffic,  thus  brought  about,  demanded 
in  turn  the  reconstruction  of  the  railroads.  After 
the  country  had  recovered  from  the  effects  of  the 

*The  result  of  the  competition  between  the  New  York  Central 
lines  and  the  Erie  Canal  was  the  principal  cause  for  the  general 
rate  reduction,  the  railroad  having  taken  practically  all  of  the 
canal  traffic  by  low  rates.  The  increased  traffic  reduced  the  cost 
of  transportation  to  such  an  extent  that  the  lower  rates  were 
more  profitable  than  the  former  high  rates. 


20  VALUATION  AND  RATES 

panic  of  1893  and  money  was  again  available  at 
reasonable  interest  rates,  a  period  of  reconstruction 
of  the  main  trunk  lines  followed,  during  which  im- 
mense sums  were  expended  in  the  rectification  of 
line  and  the  reduction  of  grade. 

In  addition  there  was  a  very  general  increase  in 
the  size  and  the  capacity  of  locomotives  used,  which 
involved  of  course  a  large  expenditure  in  purchasing 
them.  At  the  same  time,  it  was  realized  that  the 
percentage  of  dead  weight  to  the  total  load  of 
freight  cars  affected  the  economy  of  operation  to  a 
large  extent.  The  lighter  equipment  was  replaced 
by  heavier,  more  economical  cars,  which  while  car- 
rying the  traffic  at  smaller  cost  per  unit,  involved  a 
large  outlay  for  new  equipment. 

The  reconstruction  of  the  roadbed  and  the  use  of 
heavier  motive  power  and  rolling  stock,  together 
with  the  construction  of  additional  main  tracks, 
greatly  increased  the  carrying  capacity  of  the  lines 
as  a  whole.  This  increased  capacity  of  the  main 
line  was  greater  however  than  the  capacity  of  the 
roads  at  their  terminals.  The  expansion  of  ter- 
minals became,  and  still  remains,  a  very  serious 
matter  from  the  operating  and  financial  standpoint. 
The  land  necessary  to  be  acquired  in  making  the 
terminal  extensions  is  many  times  more  valuable 
per  unit  of  area  than  the  land  originally  required, 
and  the  difficulty  of  securing  capital  for  this  purpose 
is  a  most  difficult  problem  for  those  charged  with 
the  financial  management  of  the  railroad  properties. 

Character  of  Railways 

Railways  may  be  divided  into  three  general 
classes:  Military,  Political  and  Commercial.  On 
account  of  its  isolation  geographically  and  its  trea- 
ties with  adjacent  countries,  military  roads  are  not 


HISTORICAL  21 

required  in  the  United  States.  The  best  examples 
of  roads  of  this  class  are  the  network  of  railways 
constructed  by  Germany  around  all  of  its  frontiers; 
by  France  on  its  northern  frontier,  on  account  of  the 
German  construction;  the  Austrian  railways,  built 
along  its  frontiers,  and  the  Trans-Siberian  Railway 
of  Russia,  constructed  for  the  purpose  of  rapid 
mobilization  of  its  army,  which  is  scattered  over  an 
immense  territory.  These  roads,  while  to  some  ex- 
tent serving  the  commercial  interests  of  the  coun- 
tries, have  been  designed  primarily  for  military  use. 

The  best  examples  of  political  roads  in  this  coun- 
try are  the  Union  Pacific  and  the  Northern  Pacific. 
Prior  to  the  construction  of  these  lines,  that  portion 
of  the  country  lying  east  of  the  Rocky  Mountains 
had  no  connection  commercially  with  that  lying  west 
thereof,  except  by  the  water  route  around  Cape 
Horn.  There  was  comparatively  little  commerce 
between  the  people  of  the  eastern  and  western  por- 
tions of  the  country,  and  it  is  conceivable  that  with- 
out the  ties  of  commercial  intercourse,  the  portion 
of  the  United  States  lying  along  the  Pacific  coast 
might  easily  have  become  alienated  from  the  eastern 
portion. 

The  Canadian  Pacific  was  built  by  the  Dominion 
of  Canada  for  the  same  purpose,  and  it  has  had 
much  to  do  with  the  making  of  a  united  country  out 
of  what  might  well  have  been  unrelated  states.  The 
Intercolonial  was  constructed  and  is  now  operated 
by  the  Dominion  for  the  purpose  of  tying  together 
the  eastern  provinces. 

In  the  period  between  1870  and  1913,  the  Domin- 
ion Government  has  paid  in  subsidies  and  in  other 
aid  to  steam  railroads,  the  immense  sum  of  $269,- 
000,000.  The  population  in  round  numbers  in  1870 
was  3,700,000;  in  1911,  7,200,000.  This  is  a  very 
large  expenditure  per  capita,  but  the  development 


22  VALUATION  AND  RATES 

i 

seems  to  have  warranted  it,  as  such  enterprises  as 
the  construction  of  the  Canadian  roads  could  not 
have  been  successfully  consummated  without  this 
government  aid. 

The  general  policy  of  the  Dominion  Government 
has  been  to  give  a  subsidy  of  $6,400  in  cash  per  mile 
in  aid  of  the  construction  of  new  railroads.  The 
provinces  supplement  this  with  additional  aid,  the 
general  subsidy  in  Ontario  being  $2,000  per  mile 
in  cash  with  certain  grants  of  land  in  addition.  The 
total  grants  given  to  the  Grand  Trunk  Railway  for 
the  construction  of  its  Lake  Superior  branch  totaled 
$8,400  in  cash  and  6,000  acres  of  land  per  mile  of 
main  line. 

The  general  policy  of  the  Mexican  Government, 
during  the  regime  of  President  Diaz,  was  to  grant 
government  aid  to  all  new  railroads,  with  the  same 
general  purpose  in  view  as  that  of  the  Unite4  States 
and  Canada,  namely,  the  unification  of  the  people 
of  its  several  states. 

Commercial  railroads  are  those  which  are  con- 
structed for  the  purpose  of  making  a  profit  from 
their  operation.  There  are  some  few  exceptions 
to  this,  notably  the  construction  of  the  Cincinnati 
Southern,  by  the  city  of  Cincinnati,  originally  built 
to  protect  its  southern  markets  against  the  competi- 
tion of  Louisville,  Ky.,  and  the  Baltimore  &  Ohio 
Railroad,  constructed  largely  by  the  city  of  Balti- 
more and  the  state  of  Maryland,  designed  primarily 
to  protect  the  port  of  Baltimore  in  its  traffic  inter- 
course with  the  interior,  against  the  competition  of 
the  more  northern  Atlantic  seaports. 

The  discussions  contained  in  the  following  chap- 
ters do  not  apply  to  any  other  than  commercial  roads 
as  here  defined,  except  where  the  application  is 
obvious. 


PROMOTION 

When  the  production,  or  the  productive  capacity 
of  a  community  exceeds  its  own  needs,  as  to  one  or 
more  commodities,  there  arises  a  necessity  for  some 
means  of  interchanging  its  surplus  production  for 
other  commodities  which  it  requires  and  which  are 
produced  more  economically  in  other'  communities. 
Some  system  of  transportation  is  required  to  effect 
the  interchange  economically. 

The  work  of  promoting  a  railroad  to  supply  this 
need  consists,  speaking  broadly,  of  (1)  ascertaining 
as  nearly  as  may  be  the  probable  volume  of  traffic 
which  the  interchange  involves;  (2)  ascertaining 
the  approximate  cost  of  constructing  the  railroad; 
(3)  procuring  sufficient  funds  to  construct  such 
railroad  and  purchase  the  motive  power  and  equip- 
ment required  to  move  the  traffic. 

Classification 

The  construction  of  new  railroads  may  be  divided, 
from  a  Promotion  standpoint,  into  four  classes: 

(1)  Those  constructed  by  new  companies  in  un- 
developed* territory. 

(2)  Those  constructed  by  new  companies  in  ter- 
ritory served  wholly  or  in  part  by  existing  compa- 
nies. 

(3)  Those  constructed  to  develop  such  special 
commodities  as  timber,  mineral  or  stone. 

(4)  Those  constructed  by  operating  companies, 
as  extensions  of  existing  lines,  into  partially  devel- 
oped territory;   into  undeveloped  territory;   or  to 
connections  with  existing  railroads. 

The  procedure  in  organization,  construction  and 
financing  will  differ  very  materially  for  these  several 


*  Territory  not  provided  with  transportation  facilities. 


24  VALUATION  AND  RATES 

classes  of  new  lines.  Financial  considerations  will 
generally  be  controlling,  as  the  ability  to  secure  cap- 
ital limits  the  extent  and  determines  the  character 
of  the  construction. 

Difficulty  in  securing  capital  for  roads  in  classes 
(1)  and  (2)  is  much  greater  than  in  classes  (3)  and 
(4) ;  as  the  earnings  can  not  be  definitely  known  in 
advance,  the  investment  is  largely  speculative  in  con- 
sequence. In  the  case  of  class  (3),  the  extent  and 
the  commercial  value  of  the  area  to  be  developed 
may  be  known  in  advance  and  the  market  for  the 
product  fairly  well  defined,  for  which  reasons  the 
element  of  risk  will  be  small,  compared  with  classes 
(1)  and  (2).  Class  (4)  roads  have  an  advantage 
on  account  of  credit  based  on  the  physical  property 
and  franchises,  together  with  a  known  earning  ca- 
pacity of  an  operating  line. 

Time  Factor  in  Development 

With  classes  (1)  and  (2),  even  when  the  potential 
wealth  makes  ultimate  earnings  certain,  the  time 
required  for  development  can  only  be  a  matter  of 
speculation.  Failure  to  consider  this  time  factor 
has  been  the  most  prolific  source  of  disaster  to  the 
original  investors  in  railroad  securities.  Not  only  is 
the  capital  required  for  the  construction  of  the  road 
to  be  considered,  but  also  the  much  larger  capital 
required  for  the  development  of  the  country,  in 
building  new  industries,  opening  mines  and  develop- 
ing farms.  Evidently  this  latter  development  must 
take  place  before  the  traffic  of  the  railroad  itself  can 
assume  any  considerable  proportions. 

The  contract  between  the  Canadian  Government 
and  the  Grand  Trunk  Railway,  for  the  operation  of 
the  Eastern  division,  and  for  the  construction  and 
operation  of  the  Western  division  of  the  newly  con- 


PKOMOTION  25 

structed  Grand  Trunk  Pacific  Trans-continental  line, 
recognizes  the  importance  of  the  time  required  for 
development  in  connection  with  the  construction  of 
new  railroads.  This  contract  contains  the  following 
provisions,  in  connection  with  the  Eastern  division: 

"For  the  first  seven  years  of  the  said  term  the 
Company  shall  operate  the  same,  subject  only  to 
payment  of  'working  expenditure* ;  for  the  next  suc- 
ceeding forty-three  years  the  Company  shall  pay 
annually  to  the  Government,  by  way  of  rental,  a 
sum  equal  to  three  per  cent  per  annum  upon  the 
cost  of  construction  of  the  said  Division,  provided 
that  if,  in  any  one  or  more  of  the  first  three  years 
of  the  said  period  of  forty-three  years,  the  net  earn- 
ings of  the  said  Division,  over  the  above  'working 
expenditure/  shall  not  amount  to  three  per  cent  of 
the  cost  of  construction,  the  difference  between  the 
net  earnings  and  the  rental  shall  not  be  payable  by 
the  Company,  but  shall  be  capitalized  and  form  part 
of  the  cost  of  construction,  upon  the  whole  amount 
of  which,  rental  is  required  to  be  paid  at  the  rate 
aforesaid  after  the  first  ten  years  of  the  said  lease, 
and  during  the  remainder  of  the  said  term." 

It  is  to  be  noted  that  the  Government  allows  the 
Railroad  Company  the  use  of  a  railroad,  which  the 
Government  built,  for  a  period  of  seven  years  with- 
out rental  of  any  kind.  It  allows  a  further  period 
of  three  years  if  the  returns  from  the  operation 
of  the  road,  over  its  operating  expenses,  shall  not 
amount  to  the  3%  of  cost,  which  is  the  rental  pro- 
posed for  the  remaining  period  provided  for  in  the 
contract. 

In  the  mountainous  section  of  the  Western  Divi- 
sion, the  Government  agrees  to  pay  the  interest  on 
the  bonds  for  the  first  seven  years  after  the  comple- 
tion of  the  line  (with  no  recourse  on  the  Company 
for  the  interest  so  paid). 


26  VALUATION  AND  RATES 

Elements  of  Risk 

From  this  contract  it  is  evident  that  the  risk  in 
such  an  enterprise  to  an  operating  company,  for  a 
period  of  from  seven  to  ten  years,  is  so  great  that 
private  capital  will  not  undertake  it.  The  contract 
in  effect  provides,  that  the  government  by  remission 
of  its  first  seven  years'  rental  in  one  case,  and  the 
payment,  by  it,  of  the  interest  charge  on  the  bonds 
in  the  other,  assumes  what  is  considered  to  be  the 
entire  risk  of  the  enterprise.  This  contract  empha- 
sizes the  point,  that  while  there  may  be  no  doubt  of 
the  potential  wealth  of  a  territory  and  the  eventual 
success  of  the  enterprise,  the  element  of  time  re- 
quired to  convert  such  wealth  into  actual  useable 
assets,  and  thus  assure  success,  is  as  important  as 
the  matter  of  capitalization  itself.  The  reasonably 
anticipated  returns  on  capital  invested  in  the  con- 
struction of  roads  in  classes  1  and  2,  on  account  of 
the  uncertainty  of  time  required  for  development, 
must  therefore  be  much  larger  than  for  roads  in  the 
other  classes. 

A  large  part  of  the  original  investors  in  railroads 
have  lost  much  of  their  investment.  Perhaps  75% 
of  the  total  mileage  of  the  United  States  has  at  some 
time  in  its  history  been  administered  by  a  receiver. 
This,  in  spite  of  the  fact  that  the  territory  developed 
has  been  one  of  great  potential  wealth  and  that 
the  railroads  have  ultimately  become  paying  prop- 
erties. 

Extensions  of  systems,  by  the  construction  at  one 
time  of  several  hundred  miles  of  line,  have  usually 
proven  very  disastrous,  not  only  to  the  directly  inter- 
ested railroads  themselves,  but  to  the  general  busi- 
ness interests  of  the  country.  The  history  of  the 
Northern  Pacific,  Santa  Fe,  Union  Pacific  and  Cana- 
dian Pacific  are  well  known  illustrations  of  this  fact. 


PROMOTION  27 

i 

The  larger  part  of  the  railroad  mileage  in  the 
United  States  has  been  built  as  class  1  and  2  roads. 
The  present  large  systems  are  made  up  of  many 
short  lines,  which  were  originally  unrelated  local 
units.  The  line  of  the  New  York  Central,  from  New 
York  City  to  Buffalo,  was  originally  operated  by 
fourteen  different  companies.  Many  roads  originally 
built  as  class  3  have  been  improved  and  extended 
and  fall  into  class  1  or  2.  All  of  these  circumstances 
have  been  factors  in  determining  the  location,  char- 
acter, capitalization  and  organization  of  our  rail- 
roads as  they  now  exist. 

Charter 

The  first  step  to  be  taken  in  organizing  a  railroad 
corporation  is  to  obtain  a  charter  from  the  state. 
The  reasons  for  incorporating  are  several: 

(1)  The  right  to  collect  the  charges  made  for 
transporting  goods,  or  using  transportation  facilities, 
must  be  granted  by  the  state.     This  principle  was 
first  established  when  the  building  of  toll  roads  and 
canals,  constructed  by  private  capital,  were  author- 
ized by  the  state,  and  the  railroads  are  the  succes- 
sors of  these  earlier  forms  of  transportation. 

(2)  Without  the  right — conferred  by  the  Act  of 
Eminent  Domain — to  condemn  land  necessary  for  its 
right  of  way,  the  expense  in  procuring  it  would  often 
be  prohibitive.     Under  this  right  an  owner  may  be 
compelled  by  the  court  to  deed  his  land  at  a  reason- 
able price,  if  the  necessity  for  its  use  for  transporta- 
tion purposes  is  proven,  the  theory  of  the  law  being 
that  the  needs  of  the  public  as  a  whole  are  superior 
to  the  rights  of  the  individual.     The  state  has  power 
to  condemn  land  for  public  purposes,  and  it  may  and 
does  delegate  this  right,  through  charter,  with  rea- 
sonable restrictions,  to  a  railway  company.     Origi- 


28  VALUATION  AND  RATES 

nally,  and  particularly  in  the  eastern  states,  charters 
were  obtained  by  a  special  act  of  the  legislature. 
Now,  in  all  states,  charters  are  granted  under  the 
general  laws. 

(3)  To  unite  the  resources  of  many  individuals 
in  a  common  enterprise.     The  amount  usually  in- 
volved is  too  large  for  an  individual  or  a  small  body 
of  individuals  on  a  partnership  basis. 

(4)  To  limit  the  individual  liability  of  those  par- 
ticipating in  the  enterprise. 

(5)  To  insure  a  continuation  of  the  organization 
of  the  property,  regardless  of  the  death  of  individual 
members,  which  a  partnership  or  other  form  of  or- 
ganization does  not  afford. 

(6)  To  provide  a  means  for  entering  upon  the 
property  of  others,  without  trespass,  for  the  purpose 
of  surveying  and  making  the  necessary  examination 
to  establish  the  route  or  secure  data  relating  to  the 
construction  of  the  railroad. 

The  application  for  the  charter  must  state  the 
purpose  of  the  incorporation,  the  proposed  route  in 
a  general  way,  the  names  of  the  incorporators,  the 
amount  of  the  capitalization  and  the  money  actually 
paid  in,  and  other  details  varying  as  to  the  several 
states.  Some  of  the  states  require,  before  issuing 
the  charter,  that  the  promoters  make  application  to 
the  Public  Utilities  Commission,  or  similar  body,  for 
a  "certificate  of  necessity"  for  the  purpose  of  inves- 
tigating the  proposed  enterprise,  before  granting  the 
charter.  At  the  hearing  before  the  Commission,  in- 
quiry is  made  as  to  the  character  of  the  promoters, 
of  their  ability  to  manage  the  enterprise  and  raise 
the  necessary  capital,  whether  the  proposed  line  is 
merely  a  duplication  of  present  facilities,  promoted 
for  the  purpose  of  blackmailing  existing  companies, 
or  if  being  honestly  promoted  and  constructed,  it 


PROMOTION  29 

would    constitute    an    additional    and    unnecessary 
charge  on  the  communities  traversed. 

Usually  the  amount  of  capitalization  of  the  com- 
pany, at  the  time  of  its  application  for  a  charter,  will 
be  such  as  to  provide  money  necessary  to ;  (a)  make 
surveys  and  examinations  of  various  routes,  with 
maps,  profiles  and  estimates  of  cost;  (b)  compile 
statements  and  statistics  of  probable  traffic  in  ter- 
ritory tributary  to  the  line;  (c)  secure  options,  deeds 
and  franchises  for  real  estate  for  right  of  way  and 
terminal  purposes;  (d)  defray  the  cost  of  presenting 
the  proposed  enterprise  to  prospective  investors  and 
securing  the  capital  to  construct  it;  (e)  pay  the  cost 
of  preliminary  organization  and  legal  expense  at- 
tending the  procuring  of  the  charter,  appearing  be- 
fore commissions  and  such  matters. 

Cost  of  Preliminary  Work 

The  actual  cost  of  performing  these  several  serv- 
ices will  vary  widely  with  the  circumstances  sur- 
rounding the  enterprise.  If  the  proposed  railroad 
traverses  communities  urgently  in  need  of  transpor- 
tation, or  of  additional  facilities,  they  themselves 
will  furnish  much  gratuitous  service  and  the  cost 
of  obtaining  options  or  deeds  for  the  necessary  real 
estate  will,  with  favorable  local  sentiment,  be  the 
minimum,  as  will  the  collection  of  data  relating  to 
resources  and  probable  traffic  and  the  cost  of  pre- 
liminary organization  and  legal  expense. 

In  other  communities,  especially  where  the  pro- 
posed line  crosses  or  approximately  parallels  for 
some  distance  roads  in  operation,  and  transportation 
needs  are  already  wholly,  or  partially  supplied,  the 
expense  and  time  required  in  securing  right  of  way 
will  be  vastly  increased,  not  only  on  account  of  the 
lack  of  interest  of  the  citizens,  but  often  from  the 


30  VALUATION  AND  RATES 

active  opposition  of  the  trained  organization  of  the 
existing  railroad  whose  territory  is  invaded. 

The  cost  of  the  surveys  will  vary  with  the  to- 
pography of  the  country  and  with  the  number  of 
cities  and  towns  located  along  the  proposed  line,  or 
with  the  accessability  of  the  district  traversed.  Sur- 
veys in  wooded,  mountainous  country  cost  more  than 
in  prairie  country;  through  open  fields,  where  indi- 
vidual land  holdings  are  measured  in  acres,  less  than 
in  cities  where  land  is  measured  in  square  feet;  in 
districts  having  good  roads,  less  than  in  a  wilder- 
ness, where  roads  and  trails  must  be  constructed 
before  even  survey  parties  and  their  supplies  may 
be  transported. 

Reconnaissance 

The  work  of  the  engineer  will  consist  first  of  a 
reconnaissance  of  the  country  to  determine,  as  nearly 
as  may  be,  the  general  points  through  which  the  pro- 
posed line  will  be  constructed.  He  will  note  the 
valleys  running  in  the  direction  of  the  line ;  the  de- 
pressions in  ridges  or  mountains,  separating  the  val- 
leys; favorable  crossings  of  all  streams,  as  well  as 
of  other  railways;  the  location  of  lakes  or  other 
obstacles  to  be  avoided ;  the  most  f easable  route  for 
entrance  into  cities  and  villages,  taking  into  account 
the  character  of  the  property  needed  or  damaged 
by  any  particular  route  he  may  wish  to  try.  If  the 
line  be  in  a  district  not  thoroughly  explored,  he  will 
note  its  natural  advantages  from  a  traffic  standpoint, 
such  as  soil,  timber,  mineral  and  stone. 

Preliminary  Surveys 

Having  determined  on  one  or  more  general  routes 
to  be  tried,  a  "Preliminary"  survey  will  be  made, 
connecting  these  various  controlling  points  estab- 
lished by  the  engineer.  This  survey  will  show  the 


PROMOTION  31 

distance  between  the  points  and  the  elevations  to  be 
overcome.  Often  it  will  be  run  a  second  or  more 
times,  either  in  whole  or  in  part,  as  the  first  survey 
will  develop  features  not  possible  to  foresee  in  the 
reconnaissance.  Surveys  over  alternative  routes  will 
then  be  made  and  the  cost  of  construction  and  the 
advantages  of  the  several  lines  will  be  compared 
carefully. 

The  general  route  being  thus  established,  the 
location  of  the  proposed  line  will  be  made.  In  the 
preliminary  surveys,  the  line  connecting  the  several 
controlling  points  are  "angle"  lines — that  is,  turn- 
ings to  the  right  or  left  to  avoid  obstacles  or  to  take 
advantage  of  favoring  topography  will  be  made  by 
turning  angles. 

Location 

In  the  location,  the  straight  lines  between  the 
points  will  be  connected  by  the  curves  of  the  pro- 
posed operated  line.  The  located  line  is  a  job  of 
"cut  and  fit" — that  is,  to  so  adjust  the  line  to  the 
topography  of  the  country  that  it  may,  for  any  given 
standard  as  to  gradient*  and  curvature,  be  con- 
structed for  less  money  than  any  other  possible  line. 

As  the  preliminary  surveys  progress,  a  map  and 
profile  of  the  country  along  and  adjacent  to  the  line 
of  survey  are  made,  which  show  all  natural  objects 
and  differences  of  elevation.  The  located  line  is 
first  projected  on  the  map  and  a  survey  of  it  is  then 
made  on  the  ground,  first  by  "trial"  and  next  by  the 
final  location. 

The  cost  of  preliminary  lines,  per  mile  run,  will 
be  much  less  than  for  trial  and  final  location,  as  in 
the  former,  slight  turnings  by  angle  are  made  to 
one  side  of  obstructions,  such  as  trees  and  build- 


*  Gradient  is  the  ratio  of  rise  to  distance.    If  the  grade  line  rises 
one  foot  vertically  in  each  one  hundred  feet,  the  gradient  is  1$. 


32  VALUATION  AND  RATES 

ings,  while  the  located  line  must  be  accurately  run 
as  it  is  to  be  constructed,  or  carefully  "offset"  when 
the  character  of  the  obstruction  requires  it. 

Map 

The  map  of  the  proposed  located  line  is  prepared, 
showing  in  detail  the  topography  of  the  country  by 
contour  lines ;  the  exact  course  of  all  streams  crossed 
or  adjacent  to  the  line;  the  location  of  buildings, 
roads,  fences,  railroads  and  all  other  natural  ob- 
jects; the  position  of  property  lines,  with  owners' 
names,  within  say  2,000  feet  of  the  line;  the  posi- 
tion and  distance  to  government  or  other  established 
monuments  marking  recorded  land  divisions,  and 
every  physical  detail  of  the  country.  It  will  also 
show  the  location  and  extent  of  proposed  structures ; 
the  length  and  degree  of  curves;  road  and  stream 
diversions;  the  location  of  proposed  passing  tracks, 
sidings,  stations,  water  tanks  and  all  other  construc- 
tion, as  well  as  the  acreage  of  land  required  for  right 
of  way  and  terminal  purposes. 

Profile 

A  profile  is  prepared  showing,  by  longitudinal  sec- 
tion, the  variation  in  elevation  of  the  surface  of  the 
ground  along  the  center  line  of  the  proposed  rail- 
road, with  the  grade  line  and  the  gradients  of  the 
finished  roadbed;  the  cubic  contents  of  all  cuts  and 
fills  and  the  character  of  material  to  be  excavated; 
the  length  and  character  of  all  tunnels,  bridges,  cul- 
verts and  other  structures  within  the  proposed  road- 
bed. 

Estimates 

From  these  maps  and  profiles,  and  from  notes 
taken  in  the  field  for  the  purpose,  an  estimate  of  the 
cost  of  the  proposed  construction  is  made  in  detail, 


PROMOTION  33 

under  the  general  headings*  of  Track,  Real  Estate 
and  Damage,  Graduation,  Bridging,  Buildings,  Minor 
Structures  and  Miscellaneous. 

The  preparation  of  this  data  is  of  the  utmost 
importance,  as  the  financing  of  the  entire  construc- 
tion is  based  on  the  estimates  submitted  by  the  en- 
gineer. Even  after  all  of  the  data  mentioned  above 
has  been  collected,  tabulated  and  digested,  there  re- 
main questions  of  judgment  of  the  engineer  as  to 
probable  cost,  and  such  estimates  should  always  in- 
clude a  percentage  to  cover  contingencies,  such  per- 
centage varying  with  the  conditions  surrounding  the 
enterprise. 

Contingencies 

This  item  of  contingencies  in  such  estimates  is 
often  severely  criticised  and  generally  characterized 
as  a  "guess."  A  little  consideration,  however,  shows 
the  necessity  for  its  inclusion. 

The  cost  of  the  graduation — that  is,  of  excavating 
the  materials  in  the  cuts  or  borrow-pits  for  embank- 
ments and  in  tunnels — can  not  be  definitely  known 
in  heavy  work**  until  it  has  been  completed  and 
placed  in  operation,  and  often  not  then.  An  engi- 
neer knows  that  the  slopes  of  any  excavation,  with- 
out regard  to  the  lines  which  he  may  design  for  the 
finished  cross  section,  will  do  a  certain  amount  of 
"slipping"  into  the  finished  work.  In  cases  where 
the  construction  lies  along  steep  slopes,  this  slipping 
may  grow  into  a  "slide"  of  considerable  extent — 
how  considerable,  must  always  be  problematical.  It 
may  be  a  few  thousand  cubic  yards,  or  it  may  con- 
tain several  times  the  total  yardage  in  his  excavation 

*Such  estimates  now  are  usually  made  under  the  thirty-one 
headings  prescribed  by  the  Interstate  Commerce  Commission  for 
railroad  accounting. 

**Deep  cuts  and  high  fills. 


34  VALUATION  AND  RATES 

as  designed.  The  Panama  Canal  is  not  the  only  ex- 
cavation that  slips;  any  excavation  exposed  to  the 
elements  continues  to  do  so,  more  or  less,  until  it 
becomes  seasoned  or  sodded  with  vegetation. 

In  the  excavation  of  tunnels,  even  with  the  most 
thorough  examination  by  preliminary  drilling  and 
test  pits,  faults  in  the  rock  structure,  large  under- 
ground flows  of  water,  strata  of  clay  or  disintegrated 
material,  are  contingencies  which  can  be  provided 
for  in  a  general  way  only. 

Thorough  tests  by  drilling,  or  test  pits  when  prac- 
ticable, confine  the  estimates  of  probable  cost  of 
bridge  foundations  within  rather  narrower  limits 
than  in  the  instances  just  cited,  but  the  contingency 
of  sudden  floods  and  obstacles  in  the  foundation,  not 
disclosed  by  the  preliminary  examination,  must  be 
taken  into  account.  Under  favorable  conditions,  the 
foundation  of  a  bridge  pier  may  be  placed  within  a 
few  weeks  if  no  untoward  circumstances  intervene. 
On  the  other  hand,  a  sudden  rise  in  the  stream  may 
destroy  a  cofferdam  which  had  been  placed,  in  which 
excavation  had  been  made  and  masonry  foundation 
started.  If  a  large  contingent  item  has  been  added 
and  the  work  is  attended  by  peculiarly  favorable  cir- 
cumstances, the  estimate  is  excessive;  if  conditions 
are  reversed  it  is  insufficient. 

The  law  of  averages  is  the  resort  of  the  engineer 
in  such  matters.  Either  his  own,  or  the  recorded 
experience  of  others,  generally  both,  will  determine 
the  proper  percentages  to  add  to  cost.  The  diffi- 
culty, of  course,  lies  in  finding  a  recorded  experience 
of  work  exactly  like  the  one  proposed,  as  no  two 
pieces  of  construction  fulfill  this  condition.  In  the 
allowances  made  for  these  differences  he  will  show 
his  skill  or  its  lack. 

On  such  items  as  track — that  is,  ties,  rails  and 
track  fastenings — the  larger  part  of  the  item  is  ma- 


PROMOTION  35 

terial,  from  the  railroad  viewpoint,  the  market  price 
of  which  is  not  subject  to  excessive  or  sudden  fluc- 
tuation and  may  be  known  within  small  limits  of 
variation.  The  labor  cost  for  this  item  will  usually 
not  exceed  15%  of  its  total  cost  and  the  addition  for 
contingencies  will  be  correspondingly  small.  The 
same  is  true,  in  a  general  way,  of  buildings  and 
minor  structures. 

The  percentage  to  be  added  for  contingencies  on 
light  work — shallow  cuts  and  smaller  bridges — will 
be  less  than  on  work  which  includes  deep  cuts,  tun- 
nels and  important  bridges.  Some  illustrations  from 
actual  construction,  which  are  given  in  the  following 
chapter,  will  serve  to  show  the  nature  of  contingen- 
cies which  the  estimate  seeks  to  cover. 

Cost  of  Surveys 

The  cost  of  making  surveys  and  preparing  esti- 
mates will  vary  with  the  conditions  surrounding  the 
enterprise,  as  heretofore  noted.  The  following  in- 
stances are  cited  showing  what  actual  costs*  have 
been  in  certain  situations,  some  of  them  on  work 
coming  under  the  direction  of  the  author,  or  within 
his  personal  knowledge;  others  being  taken  from 
recorded  statements  of  engineers  in  charge  of  such 
work.  These  instances  are  given  as  applying  under 
the  conditions  named  and  are  not  offered  as  typical, 
except  for  those  particular  conditions. 

(A)  In  the  cleared,  hilly  country  of  southwest- 
ern Wisconsin,  the  cost  per  mile  for  accepted  loca- 
tion was  almost  exactly  $100  per  mile,  which  in- 
cluded all  costs  as  stated  in  (B).  The  route  was 
determined  in  advance  by  the  requirement  that  the 

*  These  costs  are  for  the  engineering  work  in  the  field  and  office 
and  do  not  include  any  overhead  charge. 


36  VALUATION  AND  RATES 

line  pass  through  certain  towns,  situated  within  a 
few  miles  of  each  other,  and  close  to  mine  shafts  in 
operation  and  known  mineral  deposits.  This  elim- 
inated the  examination  of  adjacent  territory  and  re- 
duced the  cost  of  examination  and  surveys  to  a 
minimum. 

(B)  In  the  rolling  prairie  country  of  southern 
Illinois,  with  little  timber,  country  largely  under  cul- 
tivation and  accessible  by  roads,  the  cost  of  the  final 
location  of  115  miles  was  at  the  rate  of  $110  per 
mile,  terminus  to  terminus.   The  cost  of  surveys  and 
examinations  in  adjacent  territory  and  of  abandoned 
lines  is  included  in  this  cost,  the  cost  per  mile  stated 
being  for  miles  of  accepted  location.    This  included 
the  salaries,  expenses  and  subsistence  of  the  engi- 
neers and  the  field  parties  making  the  surveys,  and 
the  drafting  and  other  office  salaries  and  expenses. 
It  involved  the  running  of  285  miles  of  preliminary 
line  and  160  miles  of  location. 

(C)  In  Arkansas  and  Oklahoma,  principally  a 
prairie   country,   with   occasional    "choppy"   topog- 
raphy, partly  timbered,  the  cost  of  completed  loca- 
tion per  mile,  on  the  basis  of  mileage  of  adopted 
location,  was  $192 — the  average  cost  per  mile  of 
preliminary  survey  being  $26  and  of  location  $71* 

The  location  involved  the  examination  of  several 
alternate  routes,  the  country  being  in  large  part  un- 
developed territory,  the  surveys  being  made  before 
the  "Indian  Territory"  was  made  a  part  of  the  state 
of  Oklahoma. 

(D)  In   the    wooded,    mountainous    country    of 
West  Virginia,  the  Little  Kanawha  Syndicate  spent 
$151.53  per  mile  of  located  line,  running  1,426  miles 
of  preliminary  line  and  602  miles  of  location.     This 


*Report  of  Mr.  Lavis,  C.  E.,  on  the  Choctaw,  Oklahoma  &  Gulf 
R.  R.,  now  part  of  the  Rock  Island  System. 


PROMOTION  37 

cost  includes  all  salaries,  field  and  office  expenses, 
purchase  of  instruments  and  supplies  incident  to  the 
making  of  surveys  and  preparing  maps,  profiles  and 
estimates,  with  everything  ready  to  contract  for  the 
construction  of  the  line.  On  the  basis  of  the  main 
line  mileage,  terminus  to  terminus,  omitting  located 
line  abandoned,  the  cost  was  $278.23  per  mile  of 
line. 

(E)  For  a  belt  line  in  a  city  of  30,000  population, 
in  western  Kentucky,  with  a  connecting  line  10  miles 
in  length,  to  a  river  crossing,  the  survey  and  prep- 
aration of  maps  and  estimates,  cost  at  the  rate  of 
$350  per  mile,  on  basis  of  10  miles.     The  work  in- 
volved the  mapping  of  existing  railroads  in  the  city 
and  the  survey  of  short  lines  connecting  them  at 
various  points. 

(F)  In  Canada,  in  the  uninhabited  territory  lying 
between  the  existing  railroads  and  Hudson  Bay,  the 
engineer  reporting  to  the  government  on  the  prob- 
able cost  of  the  surveys  stated: 

"The  experience  of  the  Canadian  Northern  and 
Grand  Trunk  Railways  seems  to  indicate  that  the 
cost  is  usually  from  $300  to  $500  per  mile  for  a 
final  location  in  such  a  country." 

It  will  be  noted  from  the  foregoing  that  in  a  de- 
veloped country,  devoid  of  timber,  with  the  possible 
location  confined  within  narrow  limits,  the  cost  of 
making  surveys  and  estimates  will  be  the  minimum 
—as  shown  by  (A)  ;  that  the  cost  will  increase  with 
the  number  of  possible  locations  to  be  examined — 
as  shown  by  (B)  and  (C)  ;  that  in  wooded,  moun- 
tainous country  the  cost  is  almost  three  times  the 
minimum  cost — as  shown  by  (D)  ;  that  in  uninhab- 
ited territory,  difficult  of  access  and  distant  from 
transportation  facilities,  the  cost  may  be  from  three 
to  five  times  the  minimum;  that  for  city  districts 
(small  cities)  and  immediately  adjacent  territory, 


38  VALUATION  AND  RATES 

the  cost  is  three  and  one-half  times  the  minimum 
noted.  In  large  cities  it  will  be  much  greater  than 
this. 

Estimating  Traffic 

To  arrive  at  the  probable  traffic  that  may  be  rea- 
sonably expected  at  a  given  time  on  a  proposed  rail- 
road is  a  difficult  task,  and,  except  in  special  situa- 
tions, it  can  never  be  determined  with  exactitude. 
The  best  that  can  be  done  is  to  state  that  it  will  not 
fall  below  a  certain  figure  and  that  it  will  probably 
not  exceed  some  other  figure;  of  many  enterprises 
even  this  much  may  not  be  determined  in  advance 
with  certainty.  This  fact  is  to  be  remembered,  not 
only  in  its  application  to  the  following  discussion, 
but  also  in  connection  with  the  financing  of  the  proj- 
ect, upon  which  it  has  a  most  important  bearing. 

An  obvious  exception  to  this  statement  is  that  class 
of  railroads,  usually  short,  but  often  important  from 
a  traffic  standpoint,  which  are  constructed  especially 
to  develop  some  commodity,  as  lumber  or  coal  and 
other  products  of  mines,  in  a  particular  locality. 

In  these  instances,  the  extent  of  the  timber  tract, 
or  of  the  mineral  deposit,  the  cost  of  manufacturing 
or  producing  it  and  the  extent  of  the  market  for  it, 
may  be  known  within  comparatively  narrow  limits 
of  variation,  and  the  traffic  offered  for  transportation 
may  be  determined  accurately  in  advance.  There 
are,  of  course,  fluctuations  in  the  demand  for  even 
these  every  day  necessities,  but  they  are  those  of 
ordinary  business  and  are  not  peculiar  to  the  busi- 
ness of  transportation. 

The  traffic  on  this  class  of  roads  will  rarely  bear 
any  important  relation  to  the  population  of  the  ter- 
ritory traversed  or  that  adjacent  to  it. 


PKOMOTION  39 

Methods  of  Estimating  Traffic 

There  are  three  general  methods  employed  in  de- 
termining the  traffic  expectation  of  a  proposed  road : 

(1)  On  the  basis  of  population  in  the  territory 
tributary  to  it. 

(2)  By  estimating  each  possible  source  of  traffic 
in  detail — as  the  production  of  each  factory,  sawmill 
plant,  and  even  individual  farms. 

(3)  By  comparison  with  railroads  in  operation 
in  similar  territory. 

The  first  method  involves  the  determining  of;  (a) 
the  factor  of  annual  revenue  per  capita  and;  (b) 
the  population  of  the  territory  which  may  be  con- 
sidered as  tributary  to  the  proposed  line. 

The  reports  of  the  Interstate  Commerce  Commis- 
sion are  the  reliable  sources  of  information  as  to  the 
operating  statistics  of  the  railroads. 

The  area  of  the  United  States  is  divided  by  the 
Interstate  Commerce  Commission  into  ten  groups,  as 
shown  on  the  map.  The  Interstate  Commerce  Com- 
mission's reports  give,  for  the  United  States  as  a 
whole,  and  for  each  of  the  ten  groups,  the  gross 
earnings  per  mile  of  road  operated  and,  formerly, 
the  per  capita  earnings. 

The  average  earnings  per  capita  for  the  entire 
country  is  of  little  value  in  determining  the  prospec- 
tive earnings  of  any  particular  line  of  proposed  road. 
Neither  is  the  average  earnings  for  the  entire  group 
in  which  the  proposed  line  is  located  serviceable, 
even  as  a  very  rough  approximation.  The  following 
table  given  in  the  Interstate  Commerce  Commission's 
report  for  1900  will  serve  to  illustrate  this  fact. 
(The  report  for  1910  does  not  contain  similar  infor- 
mation, which  explains  the  use  of  tables  now  out 
of  date,  but  the  figures  are  close  enough  to  the  truth 
for  this  illustration.) 


40 


VALUATION  AND  RATES 


PROMOTION  41 

Revenue  Per  Capita  by  Groups 
From  I.  C.  C.  Report  1900 

Total  Percentage  of  total 

Group,      revenue.  Pass.  Freight.        Pass.  Freight.  Other. 

1 $17.31  $6.59  $9.26  38  53  9 

2 21.55  4.75  15.43  22  72  6 

3 23.14  4.68  16.74  20  72  8 

4 10.39  2.18  7.46  21  72  7 

5 10.62  2.12  7.65  20  72  8 

6 23.74  4.64  17.04  20  72  8 

7 35.05  6.60  25.77  19  73  8 

8 20.30  3.77  14.76  18  73  9 

9 13.97  2.55  10.44  18  75  7 

10 30.49  7.90  20.49  26  67  7 

Entire 

U.S.  19.67  4.28  13.88  22  70  8 

The  passenger  earnings  with  variations  from  $2.12 
to  $7.90  per  capita,  and  the  freight  from  $7.46  to 
$25.77  per  capita,  show  that  the  average  for  the 
entire  United  States  is  not  applicable  to  any  particu- 
lar line. 

The  large  total  earnings  per  capita  in  Group  7  is 
caused  by  the  fact  that  the  proportion  of  the  rates 
on  through  business  between  groups  lying  on  either 
side  of  it  is  credited  to  Group  7.  As  the  area  in 
Group  7  is  large,  the  population  small,  the  length  of 
line  great,  relatively,  the  earnings  per  capita  are 
much  above  the  average  for  other  groups.  The  point 
to  be  noted  is,  that  the  figure  per  capita  would  have 
no  value  as  indicating  the  probable  revenue  to  be 
derived  from  developing  the  territory  within  Group 

7  itself,  as  the  revenue  is  not  derived  from  traffic 
originating  in  or  destined  to  points  located  in  that 
group.    The  same  is  true,  in  lesser  degree,  of  Groups 

8  and  10. 

The  earnings  in  Groups  2,  3  and  6  vary  within 
narrow  limits  and  are  large  on  account  of  the  terri- 


42  VALUATION  AND  RATES 

tory  being  adapted  to  agriculture,  manufacturing 
and  mining,  which  interests  interchange  their  re- 
spective products. 

The  products  of  Groups  4  and  5  are  in  the  main 
agricultural,  and  the  per  capita  earnings  are  small. 
These  groups,  however,  contain  such  districts  as  the 
coal  fields  of  West  Virginia  and  the  manufacturing 
and  mining  districts  of  Birmingham  and  Chattanoo- 
ga, where  the  per  capita  earnings  of  individual  lines 
are  large.  Evidently  the  average  for  the  groups 
would  not  apply  to  a  railroad  developing  a  mining 
district  within  them. 

The  second  method,  if  used  at  all,  requires  much 
skill  and  good  judgment,  based  on  experience,  in 
applying  it. 

It  is  not  a  difficult  matter,  although  it  usually  en- 
tails much  labor,  to  make  an  inventory  of  all  sources 
of  traffic  within  a  given  area  at  the  time  the  inves- 
tigation is  made.  This  does  not  solve  the  question 
completely,  for  in  all  new  enterprises  it  is  che  further 
development  of  existing  sources  of  traffic  and  the 
creation  of  new  ones  that  furnish  the  profit  to  the 
railroad.  To  estimate  the  extent  of  prospective  busi- 
ness is  a  difficult  matter;  to  predict  with  any  cer- 
tainty the  time  required  to  develop  the  anticipated 
increase — which  is  more  important  to  the  original 
investor  than  the  ultimate  amount — is  not  possible. 
At  the  best,  this  method  can  be  only  an  educated 
guess ;  it  serves,  however,  to  check  other  methods. 

The  third  method — by  comparison  with  other  rail- 
roads in  similar  territory — is  much  more  satisfactory. 
There  are  no  two  railroads  exactly  alike  as  to  con- 
ditions surrounding  their  operation,  and  the  skill  of 
the  estimator  in  making  allowances  for  the  differ- 
ences will  be  the  measure  of  the  accuracy  of  the 
estimate. 


PROMOTION  43 

The  operating  factors  of  an  entire  system  of  rail- 
road, comprising  several  thousand  miles  of  line 
traversing  territory  with  varying  characteristics,  are 
not  applicable  to  a  new  railroad,  say  100  miles  long. 
The  figures  of  a  division  or  a  shorter  unit  are  the 
ones  to  be  applied. 

Not  only  are  the  earnings  of  the  operated  road 
at  the  time  of  the  investigation  to  be  secured,  but  if 
possible  the  earnings  in  the  years  immediately  fol- 
lowing its  completion,  as  the  time  required  to  de- 
velop the  traffic  is  the  essence  of  the  estimate,  from 
the  standpoint  of  an  investor  in  a  new  railroad. 

Detailed  Analysis  Important 

In  determining  the  extent  of  the  territory  to  be 
considered  tributary  to  the  proposed  line,  the  maps 
of  the  country  traversed  and  adjacent  to  it  must  be 
studied  in  detail.  The  shipper  may  always  be  relied 
upon  to  go  to  the  railroad  most  convenient  for  him. 
The  location  of  ridges,  character  of  roads,  and  posi- 
tion of  bridges  over  large  streams  will  often  deter- 
mine the  boundaries  of  the  actual  tributary  territory. 
After  the  boundaries  have  been  defined,  the  actual 
population  at  a  given  time  may  be  obtained  from 
the  school  census  and  other  sources,  the  growth  in 
population  in  recent  years  being  also  noted  as  form- 
ing a  basis  for  the  prediction  of  prospective  traffic. 

Where  there  are  other  railroads  serving  the  towns 
along  the  proposed  line,  the  whole  population  can- 
not be  included  in  the  estimate  of  population  served 
by  it.  A  percentage  based  on  the  number  and  rela- 
tive importance  of  the  several  lines  to  the  particular 
community  considered  will  be  used.  Such  circum- 
stances as  the  location  of  the  several  freight  stations 
of  competing  lines  must  be  taken  into  account.  If  a 


44  VALUATION  AND  RATES 

shipper  has  a  choice  of  delivering  goods  to  a  station 
within  two  or  three  city  blocks,  he  will  rarely  haul 
it  one  mile  to  another,  if  the  loading  and  transpor- 
tation facilities  are  equal.  Failure  to  realize  the  im- 
portance of  such  matters  has  resulted  disastrously 
to  some  prominent  enterprises,  one  illustration  of 
which  will  suffice. 

The  line  of  the  New  York  Central  between  Chi- 
cago and  New  York,  built  during  the  early  days  of 
railroad  construction,  penetrated  to  the  centers  of 
business  at  its  termini  and  passed  through  the  busi- 
ness centers  of  all  cities  and  towns  along  the  line. 
The  eagerness  of  the  various  cities  and  towns  for 
transportation  facilities  and  the  comparatively  low 
price  of  land  at  the  time  of  construction,  made  this 
possible. 

In  the  '80s,  its  entire  line  between  these  termini 
was  paralleled  by  competing  lines.  The  construc- 
tion of  the  first  line  had  increased  the  population  of 
all  of  the  cities  and  towns,  and  in  consequence  the 
price  of  real  estate  had  been  multiplied  many  times. 
The  cost  of  real  estate  and  consequential  damage  for- 
bade the  construction  of  a  new  line  into  the  business 
centers  of  the  termini  and  the  intermediate  cities, 
In  consequence  the  stations  of  the  new  lines  were 
located  at  some  distance  from  the  business  centers, 
and  the  cost  of  delivery  of  freight  was  greater  to 
such  stations  than  to  those  of  the  older  road.  There 
was  no  reason  why  a  shipper  should  pay  more  for 
hauling  his  freight  to  and  from  the  new  station,  and 
this  meant  that  either  the  old  road  obtained  prac- 
tically all  of  the  business  or  the  new  road  was  forced 
to  make  a  concession  to  the  shipper  (reduce  its  own 
revenue)  to  compensate  him  for  the  increased  cost 
of  trucking  his  freight  a  greater  distance.  A  care- 
ful analysis  of  the  traffic  expectancy  would  have  dis- 
closed this  fact  as  to  the  intermediate  towns, 


PROMOTION  45 

At  the  New  York  terminus  a  different  condition 
obtained.  As  the  terminus  of  the  new  road  was 
across  the  Hudson  River,  it  involved,  for  a  passenger, 
a  ferry  trip  across  the  river  and  a  long  ride  there- 
after to  the  business  center  of  New  York,  while  the 
terminus  of  the  old  line  was  in  the  city  near  its  busi- 
ness center.  Evidently  no  great  amount  of  passenger 
revenue  could  be  anticipated  for  the  new  road  with- 
out making  concessions  in  fare  (reducing  its  rev- 
enue) to  the  passenger. 

The  freight  situation  in  New  York  was  somewhat 
different,  however,  because  a  large  proportion  of 
transfers  to  freight  terminals  was  made  by  car  fer- 
ries on  the  rivers,  and  the  terminus  of  the  new  road 
was  about  as  favorably  situated  for  this  purpose  as 
the  old.  Its  freight  traffic  expectancy  at  New  York, 
therefore,  was  comparable  with  that  of  the  old  road. 

It  is  needless  to  add  that,  in  the  competition  for 
business  which  ensued  between  the  new  and  the  old 
roads,  the  newer  roads  were  forced  into  bankruptcy. 
This  instance  is  given  to  emphasize  the  need  of  con- 
sidering all  of  the  factors  in  making  or  analyzing 
traffic  estimates;  many  others,  similar  in  a  general 
way,  might  be  quoted. 

To  determine  the  earnings  per  capita  of  the  oper- 
ated line,  with  which  the  comparison  is  made,  an 
examination  of  its  territory  should  be  made  in  the 
same  manner  as  above  outlined.  Due  allowance 
being  made  for  differences  in  surrounding  conditions, 
the  revised  per  capita  earning  is  applied  to  the  pop- 
ulation within  the  area  tributary  to  the  new  road, 
and  its  gross  annual  earnings  thus  estimated. 

In  this  connection,  the  matter  of  division  of  rates 
on  the  prospective  traffic  should  be  made  a  special 
study.  The  practice  of  allowing  the  road  which 
originates  or  delivers  the  traffic  a  certain  arbitrary 
amount  or  a  minimum  percentage  of  the  entire  trans- 


46  VALUATION  AND  RATES 

portation  charge  from  origin  to  destination,  without 
regard  to  the  distance  which  the  originating  or  de- 
livering road  may  move  the  traffic,  is  recognized  by 
all  the  railroads  of  the  country. 

The  revenue  derived  from  any  shipment  passing 
over  more  than  two  roads  will  generally  be  divided 
pro  rata,  on  a  basis  of  mileage,  after  the  deductions 
of  the  minimums  allowed  for  the  originating  and 
delivering  lines  have  been  made.  On  many  roads 
this  principle  of  "minimums"  will  affect  the  revenues 
radically,  which  the  following  example  will  serve  to 
show: 

An  independent  railroad,  25  miles  long,  serves  a 
mine  producing  ore,  which  is  shipped  a  total  distance 
of  400  miles  to  a  smelter,  over  the  originating  line  A 
and  its  connecting  line  B.  The  freight  rate  is  on 
the  basis  of  5  mills  per  ton-mile,  making  the  total 
revenue  $2  per  ton.  If  "A"  is  allowed  a  minimum 
of  25%,  its  proportion  of  the  revenue  will  be  fifty 
cents  per  ton ;  if  the  division  is  made  on  the  mileage 
basis,  its  proportion  will  be  one-sixteenth  of  the  total 
revenue,  or  twelve  and  one-half  cents  per  ton. 

The  principle  involved  is,  that  the  revenue  of  a 
railroad  is  not  in  all  cases  based  on  the  product  of 
its  tonnage  by  a  fixed  rate  per  mile  of  its  haul.  If 
its  traffic  is  made  up  largely  of  business  which  it 
delivers  or  originates,  its  revenue  per  ton-mile  will 
be  comparatively  large ;  if  it  is  made  up  principally 
of  business  in  which  it  acts  as  an  intermediate  car- 
rier, its  revenue  per  ton-mile  will  be  small. 

On  all  large  systems,  the  business  consists  of  a 
large  amount  of  both  classes  of  traffic;  on  shorter 
lines  and  smaller  systems,  it  may,  and  often  does, 
consist  of  a  great  predominance  of  one  class  over  the 
other,  and  in  consequence  any  given  tonnage  will  in 
the  one  case  produce  a  much  greater  revenue  than  in 
the  other. 


PROMOTION  47 

In  the  past,  traffic  estimates  have  not  generally 
received  such  detailed  analysis,  but  have  consisted 
principally  of  the  personal  opinions  of  the  estimators, 
more  or  less  expert,  with  little  reliable  data  to  sup- 
port them.  The  margin  of  profit  in  transportation 
has  now  become  so  narrow  that  the  better  methods 
are  absolutely  essential  in  making  even  approximate 
traffic  estimates. 

This  discussion  shows  clearly,  however,  that  as  to 
the  roads  built  in  the  earlier  periods  of  railroad 
construction,  and  as  to  all  roads  in  undeveloped  ter- 
ritory, the  element  of  risk  for  those  investing  in  such 
enterprises  was  very  large  indeed  on  account  of  the 
uncertainty  of  the  estimates  of  traffic  expectancy. 

The  cost  of  making  traffic  estimates  will  vary  with 
the  conditions.  In  the  case  of  a  short  extension  of 
an  operated  road,  the  estimate  is  usually  made  by 
its  chief  traffic  officials,  the  field  work  of  gathering 
data  being  done  by  one  or  more  of  the  minor  traffic 
officials. 

In  the  case  of  an  extension  of  several  hundred 
miles,  or  of  a  new  company,  or  of  an  independent 
investigation  by  the  prospective  underwriters  of  the 
enterprise,  it  would  involve  the  payment  of  a  large 
fee  for  the  services  of  a  traffic  expert  and  the  em- 
ployment of  enough  assistants  to  collect  the  data 
and  tabulate  and  arrange  it  for  consideration  and 
analysis.  The  costs  per  mile  vary  so  widely  that 
the  figures  for  any  particular  situation  would  serve 
no  useful  purpose  for  specific  application,  even  if 
such  figures  were  available. 

Real  Estate  and   Franchises 

In  the  earlier  period  of  railroad  construction,  at 
least  for  the  first  one  or  two  railroads  traversing  the 
same  territory,  the  difficulties  and  cost  of  obtaining 


48  VALUATION  AND  RATES 

land  for  right  of  way,  depot  grounds  and  terminal 
purposes  were  the  minimum.  In  many  instances  the 
required  land  was  given  without  cost  to  the  railroad, 
and  in  addition  a  bonus  in  money.  The  promoter, 
in  presenting  the  matter  to  prospective  investors, 
was  often  able  to  show  deeds  for  the  larger  part  of 
the  required  land  and  guarantees  of  the  several  com- 
munities covering  the  cost  of  acquiring  the  balance. 

The  difficulty  and  cost  of  acquiring  land  for  a  rail- 
road varies  with  the  character  and  extent  of  the 
transportation  existing  in  the  territory  traversed  at 
the  time  of  the  proposed  construction.  This  is  as 
true  now  as  it  ever  was,  the  difference  between  pres- 
ent and  earlier  conditions  being,  that  in  that  portion 
of  the  country  east  of  the  100th  meridian  and  west 
of  the  120th,  the  country,  generally,  has  been  pro- 
vided with  transportation. 

Webb,  in  "Economics  of  Railway  Construction," 
illustrates  this.  "If  the  whole  country  was  grid- 
ironed  with  railroads  running  north  and  south  and 
east  and  west,  at  a  distance  apart  of  25  miles,  only 
one  point  in  each  square  would  be  as  far  as  12.5 
miles  from  a  railroad.  Such  squares  would  have  50 
miles  of  road  for  625  square  miles  of  territory,  or  8 
miles  for  100  square  miles  of  territory.  The  aver- 
age for  the  whole  United  States,  8.08,  is  even  now 
(1912)  greater  than  this.  Maine  is  the  only  state 
east  of  the  95th  meridian  in  which  the  number  is 
less  than  8." 

This  means,  generally  speaking,  that  railroad  con- 
struction east  of  the  100th  meridian  will  in  future 
consist  of  short  lines  or  branches  from  existing  roads. 
The  most  notable  exception  to  this  will  be  the  rare 
construction  of  new  connections  between  large  sys- 
tems, necessitated  by  radical  changes  in  manage- 
ment. 


PROMOTION  49 

Options  and  Franchises 

With  the  exception  first  noted,  the  cost  of  real 
estate  is  an  important  item  for  a  proposed  railroad, 
being  a  considerable  percentage  of  total  cost.  To 
estimate  it  exactly,  in  advance  of  its  acquirement,  is 
not  possible. 

In  so  far  as  practicable,  options  will  be  taken  on 
needed  land  immediately  after  the  location  of  the 
line  is  decided  on,  and  in  many  instances  before  even 
a  survey  is  made.  These  will  state  the  price  at 
which  the  land  owner  will  deed  the  required  prop- 
erty within  a  stated  period  of  time. 

Under  favoring  conditions  the  cost  of  the  option 
of  purchase  will  be  nominal  in  small  towns  and 
country  districts.  Unless  there  is  some  urgent  de- 
mand for  the  road,  (and  with  some  owners  in  any 
event)  the  price  demanded  for  the  option  may  be 
a  considerable  percentage  of  the  purchase  price. 

For  property  within  cities,  particularly  the  high 
priced  property,  the  option  will  rarely  be  given  with- 
out the  payment  of  a  substantial  percentage  of  the 
purchase  price.  The  point  to  be  noted  in  this  con- 
nection is,  that  the  possible  amount  of  loss  to  the 
promoters  is  seriously  affected  by  the  ease  with 
which  the  options  are  obtained,  and  the  amounts  of 
the  cash  payments  made  to  secure  them,  for  in  case 
the  line  is  not  financed,  the  amounts  so  paid  are  ir- 
revocably lost.  This  condition  increases  the  risk  to 
be  assumed  by  the  promoters  of  the  enterprise. 

In  addition  to  the  charter  secured  from  the  state, 
it  will  be  necessary  in  most  states  to  obtain  from 
the  County  Commissioners  (in  some  states  Public 
Service  Commission  or  similar  body)  the  right  to 
cross  the  public  highways  and,  from  incorporated 
cities  and  towns,  the  right  to  cross  or  occupy  public 
streets  and  other  public  places  or  property.  This 


50  VALUATION  AND  RATES 

may  be  a  simple  matter  or  a  very  complicated  one, 
involving  the  expenditure  of  considerable  sums  of 
money  and  much  time.  Some  of  our  worst  munic- 
ipal scandals  have  arisen  in  connection  with  the  pro- 
curing of  railroad  franchises  in  cities. 

Elements  of  Cost  and  Damage 

Some  of  the  right  of  way  must  be  condemned,  even 
under  the  most  favorable  conditions.  The  courts 
must  authorize  the  passing  of  title  to  land  taken 
from  any  estate  in  which  minor  heirs  are  interested. 
No  agreement  between  administrators  of  such  estates 
involving  the  title  of  land  is  valid  without  the  sanc- 
tion of  the  court. 

In  all  cases  where  the  company  can  not  agree  with 
the  land-owners  as  to  price  of  land  to  be  acquired, 
the  value  of  the  land  taken  and  the  consequential 
damage  to  adjoining  land  must  be  determined  by  a 
jury  or  commissioners  appointed  by  the  court.  The 
item  of  damage  to  land  not  taken  is  the  serious  one 
for  the  railroad  company,  as  the  following  illustra- 
tions will  show:  (See  Figure  No.  1.) 

The  court  instructs  the  jury  to  determine  three 
separate  and  distinct  things: 

(1)  The  market  value  of  the  tract  of  land  taken 
by  the  railroad,  in  this  case  5  acres. 

(2)  The  damage  to  the  two  remaining  tracts, 
"A"  containing  20  acres  and  "B"  containing  615 
acres. 

(3)  The  benefit  to  A  and  B  which  may  fairly  be 
expected  from  the  operation  of  the  railroad. 

The  market  value  of  the  right  of  way  is  proven 
by  witnesses  to  be,  say  $100  per  acre.  The  triangu- 
lar strip  "A"  is  cut  off  from  the  balance  of  the  own- 
er's land  "B"  and  subjects  him  to  perpetual  incon- 
venience and  danger  in  crossing  an  operated  railroad 


PROMOTION  51 

in  doing  his  farm  work.  Furthermore,  his  field  is 
not  square  and  it  will  not  be  possible  to  convince  a 
jury  (or  a  judge  either)  that  such  a  field  is  as  desir- 


Area  of  A  20  Acres 

Area  of  B  615  Acres 

Right  of  Way         5  Acres 

640  Acres 


Figure  1. —  Land    Damage 

able  as  if  it  were,  in  spite  of  the  fact  that  it  will 
raise  as  much  corn  or  wheat  per  acre  in  its  triangu- 
lar form  as  it  did  before.  The  very  best  that  the 
company  could  expect  as  to  "A"  would  be  the  assess- 
ment of  50%  of  market  value  as  the  damage  (whole 
damage  less  benefit.)  As  to  "B"  it  is  no  longer 
square  and  to  the  ordinary  jury,  particularly  in  an 
agricultural  community,  a  net  damage  of  $5  per  acre 
seems  not  excessive. 

The  cost  of  land  and  consequential  damage  to  the 
railroad  company  for  the  five  acres  actually  taken  is : 


52  VALUATION  AND  RATES 

Five  Acres  of  Right  of  Way  at  $100 $    500 

Damage  to  A — 20  Acres  at  $50 1,000 

Damage  to  B — 615  Acres  at  $5 3,075 

Total  Land  and  Damage $4,575 

The  cost  to  the  railroad  company  is  $915  per  acre, 
through  land  whose  market  value,  for  agricultural 
purposes,  is  $100  per  acre. 

It  may  be  argued  that  the  supposed  case  is  ex- 
treme and  that  the  ordinary  holdings  of  land  are  less 
than  640  acres.  If  the  entire  holding  had  been  160 
acres,  (as  shown  by  dotted  line  in  the  figure)  with 
the  damages  assessed  as  in  the  case  noted,  the  cost 
per  acre  to  the  railroad  company  would  have  been 
$435  per  acre  of  land  actually  taken.  If  the  holding 
had  been  40  acres,  the  damage  would  have  been  the 
same  on  both  sides  of  the  right  of  way  and  the  cost 
per  acre  to  the  railroad  would  have  been  $450  per 
acre  of  land  actually  taken. 

Should  the  construction  of  the  roadbed  contem- 
plate a  deep  cut  or  high  fill  across  the  land,  the 
damage  is  still  further  increased. 

The  consideration  of  the  fact  that  the  owner  of 
"A"  may  sell  to  "C"  or  "E"  and  that  the  damage 
and  inconvenience  of  cultivating  "A"  on  account  of 
the  railroad  crossing  would  thereby  be  eliminated,  is 
not  allowed,  the  damage  being  assessed  on  the  basis 
of  continued  ownership  of  "A." 

The  conditions  shown  in  Figure  2  are  not  uncom- 
mon. The  land  value  and  damage  is  determined  as 
in  the  instance  just  given,  but  there  must  be  added 
to  it  the  damage  to  improvements.  Even  though  the 
right  of  way  of  the  railroad  does  not  actually  include 
any  part  of  the  residence,  barn  or  water  supply,  it 
destroys  the  home  site,  making  it  impracticable 
(practically  impossible)  to  use  the  buildings  for  the 


PROMOTION 


53 


purpose  for  which  they  were  constructed.  An  in- 
vestment of  $3,000  in  residence,  barn,  granary,  poul- 
try houses  and  sheds  for  farm  tools,  would  provide 
only  a  very  modest  home  place  and  its  whole  value 


's      Figure  2.— Improvement  Damage 


is  practically  destroyed  for  that  purpose.  The  cost 
to  the  railroad  company  for  the  five  acres  of  land 
required  by  it  is  then: 

Five  Acres  of  Right  of  Way  at  $100 $    500 

Damage  to  35  Acres  at  $50 1,750 

Damage  to  Buildings  and  Improvements .   3,000 


Total  Land  and  Damage $5,250 

The  cost  to  the  railroad  company  is  $1,050  per 
acre,  through  land  whose  market  value  is  $100  per 
acre. 

The  instances  just  given  apply  to  cost  and  damage 
of  agricultural  and  other  land  outside  of  cities  and 
towns ;  the  following  relates  to  the  cost  and  damage 
within  cities. 

It  is  to  be  noted;  first,  that  the  individual  tract 
of  land  (city  lot)  within  cities  is  much  smaller  than 


54 


VALUATION  AND  RATES 


in  the  country ;  second,  that  the  area  within  cities  has 
generally  been  improved  with  buildings  and  other 
construction  to  a  much  larger  extent  than  in  the 
country.  By  reason  of  this  the  consequential  damage 
to  land  will  be  comparatively  less  (a  smaller  per- 
centage of  the  total  cost  per  acre  on  basis  of  land 
required)  and  the  damage  to  buildings  and  other 
property  much  higher  in  city  than  in  country  prop- 
erty.  ,  ? 

i      I 


\ 


1 
i 

i 
i 

\ 

i 
i 

t 

/ 

\ 

\! 

i          K 

Figure  (3,  |         X 

The  sketch  shown  as  Figure  No.  3  illustrates  the 
condition  in  subdivided  city  property.  It  represents 
a  city  block,  containing  12  lots  with  a  50  ft.  frontage 
150  ft.  deep,  with  a  20  ft.  alley  between  the  lots. 

The  most  unfavorable  condition  is  the  location  of 
the  right  of  way  as  shown  by  solid  lines.  In  this 
case  it  is  evidently  the  better  policy  to  buy  the  whole 
block,  to  avoid  contingent  damage  suits  by  the  own- 
ers of  the  only  two  lots  in  the  block  not  actually 
touched  by  the  right  of  way  lines. 


PROMOTION  55 

Suppose  the  value  of  each  lot,  which  contains  (150 
ft.  x  50  ft.)  7,500  square  feet,  is  $100;  the  value  is 
one  and  one-third  cents  per  square  foot.  The  area 
within  the  block,  actually  occupied  by  the  right  of 
way,  contains  (375  ft.  x  100  ft.)  37,500  square  feet, 
which  at  the  rate  of  one  and  one-third  cents  per 
square  foot  makes  its  value  $500.  The  twelve  lots 
which  must  be  taken  will  cost  $1,200,  or  2.4  times 
as  much  as  the  value  of  the  property  actually  re- 
quired for  railroad  purposes.  In  addition  to  this, 
the  entire  value  of  all  improvements  on  the  property 
must  be  added  to  the  cost. 

The  most  favorable  condition  is  the  location  of  the 
right  of  way  shown  by  the  dotted  lines.  In  this  case 
the  six  lots  on  the  right  side  of  the  alley  must  be 
taken  and  the  railroad  company  is  liable  for  contin- 
gent damage  to  the  property  on  the  left  side  of  the 
alley,  if  it  is  of  such  a  character  (as  residence  prop- 
erty) that  the  facts  will  support  the  claim. 

The  railroad  company  must  pay  all  of  the  costs 
of  the  proceedings  in  condemnation  suits.  Where 
the  number  of  condemnations  is  any  considerable 
percentage  of  the  total,  it  will  add  materially  to  the 
cost  of  the  land  required. 

This  fact  has  a  bearing  on  the  price  to  be  paid  for 
land  not  obtained  by  condemnation.  The  buyer  for 
the  railroad  company  has  two  limits  to  the  price  he 
will  pay ;  one  its  market  value  without  any  addition, 
as  the  minimum;  another  the  value  which  experi- 
ence teaches  him  the  land  owner  may  obtain  by  a 
condemnation  proceeding,  plus  the  cost  of  the  con- 
demnation proceeding.  The  land  owner,  or  his  law- 
yer, will  also  have  an  idea  of  value  based  on  this 
latter  consideration,  and  the  railroad  buyer  will  give 
his  maximum  price  before  going  to  court,  to  avoid 
the  delay  and  the  risks  of  an  uncertain  jury. 


56  VALUATION  AND  RATES 

Statistics  show  that,  through  farm  lands,  the  ac- 
tual cost  per  unit  of  land  (as  an  acre)  is,  as  an  aver- 
age for  a  whole  line,  from  2  to  3.5  times  its  market 
value;  through  incorporated  towns  and  cities  from 
1%  to  2y2  times  the  market  value.  The  explanation 
of  the  latter  factor  being  lower  than  the  first  lies  in 
the  fact  that  the  company,  within  incorporated  lim- 
its, usually  buys  all  of  a  tract  of  land  which  its  right 
of  way  encroaches  upon,  however  small  the  area 
involved  may  be,  and  the  consequential  land  damage 
as  a  result  is  smaller  than  in  the  case  of  farm  lands 
where  the  damaged  area  not  required  is  generally 
large. 

The  circumstances  related  above  are  the  basis  of 
the  oft-repeated  complaint  of  the  railroads  that  they 
pay  much  more  than  anybody  else  for  land.  The 
truth  of  the  matter  is  that  their  cost  includes  more 
than  one  item,  viz. : 

(1)  Cost  of  land  purchased  under  necessity  both 
as  to  time  and  location. 

(2)  Consequential  damages  to  land  not  taken,  by 
reason  of  the  impracticability  of  the  location  of  its 
right  of  way  following  or  conforming  to  established 
land  lines,  and  of  the  nature  of  the  use  to  which  the 
land  is  put — danger,  delay  and  inconvenience  to  its 
neighbors  from  operation  of  trains. 

(3)  Damage  to  improvements,  such  as  buildings, 
water  supply  and  the  rearranging  of  division  lines 
within  an  owner's  tract. 

(4)  The  expense  of  procuring  the  land  by  con- 
demnation proceedings  or  otherwise,  involving  em- 
ployment of  experts,  expensive  court  costs,  attorney's 
fees  and  long  delays  to  construction. 

If  a  manufacturer's  plant,  from  the  nature  of  its 
operation  required  a  long  "shoestring"  of  land, 
partly  straight  and  partly  curved,  winding  in  and 
out  between  and  into  buildings  constructed  for  other 


PROMOTION  57 

purposes,  in  a  district  theretofore  devoted  to  other 
purposes  than  manufacturing,  as  residence  property, 
his  costs  would  approximate  the  railroad  companies' 
cost. 

Many  construction,  and  practically  all  physical 
valuation  estimates  of  cost  of  railroad  real  estate, 
have  been  made  by  applying  the  factors  above  men- 
tioned to  a  proposed  line  or  the  particular  section  of 
operated  line  under  consideration.  That  is,  the 
number  of  acres  in  any  agricultural  section  was  mul- 
tiplied first  by  the  ascertained  market  value  and  then 
by  a  factor  of  say  three  (the  one  commonly  em- 
ployed) ;  in  areas  within  incorporated  limits  the  mar- 
ket price  was  first  multiplied  by  two  and  this  product 
was  applied  as  a  unit  cost  to  the  land  under  con- 
sideration. 

The  conditions  surrounding  different  lines  of  rail- 
roads vary  so  widely,  that  the  results  thus  obtained 
are  not  even  fair  approximations.  The  work  in- 
volved in  giving  each  tract  of  land  or  each  block,  or 
several  blocks  of  property,  detailed  consideration  is 
necessary  and  well  repays  the  cost  and  time  re- 
quired. Even  so  the  estimate  will  be  based  on  many 
uncertainties  and  must  be  stated  with  many  reserva- 
tions. 

Relative  Importance  of  Real  Estate 

For  new  railroads  traversing  an  agricultural  dis- 
trict in  greater  part,  the  cost  of  the  real  estate  will 
not  usually  fall  below  10%  of  the  total  cost  of  the 
road  (note  specific  exceptions  heretofore  referred 
to)  ;  nor  will  it  often  exceed  25%  of  such  total  cost. 
For  railroads  constructed  largely  in  and  adjacent  to 
centers  of  population — as  belt  lines  and  connecting 
lines  in  and  near  large  cities — the  cost  of  the  real 
estate  rarely  forms  so  small  a  percentage  of  the 


58  VALUATION  AND  RATES 

total  cost  as  25%  and  often  is  several  times  the  total 
cost  of  all  other  items. 

Securing  Capital 

The  cost  of  presenting  the  data  heretofore  men- 
tioned and  of  securing  the  needed  capital  for  con- 
struction, will  be  very  much  larger  for  new  com- 
panies than  for  the  older  operating  companies  mak- 
ing extensions.  In  the  one  instance  the  investment 
is  to  be  based  on  faith  in  an  untried  venture ;  in  the 
other  on  past  performances  of  a  property  and  its 
management. 

In  the  latter  instance,  provided  its  reputation  jus- 
tifies it,  the  presentation  to  bankers  who  underwrite 
such  enterprises  is  comparatively  a  simple  matter, 
attended  to  by  the  executive  officials  of  the  operat- 
ing road.  These  bankers,  after  examining  the  data 
submitted  and  getting  the  opinion  of  their  own  ex- 
perts as  to  its  reliability  and  the  correct  interpreta- 
tion of  what  it  means  from  an  economical  standpoint, 
accept,  reject  or  defer,  as  the  case  may  be.  If  the 
promoter  of  the  new  company  can  impress  such 
bankers  favorably  at  the  start  he  is,  indeed,  fortu- 
nate above  the  majority  of  his  kind. 

Details  of  Financing 

In  the  earlier  days  of  railroad  construction,  par- 
ticularly in  that  portion  of  the  country  west  of  the 
Allegheny  Mountains,  a  not  uncommon  plan  adopted 
was  to  obtain  a  portion  of  the  money  by  local  sub- 
scription within  or  adjacent  to  the  territory  to  be 
traversed  by  the  proposed  railroad,  and  a  certain 
other  portion  from  eastern  or  foreign  syndicates. 

If  the  local  subscriptions  were  of  an  amount  suf- 
ficient to  provide  for  the  real  estate,  grading,  bridg- 
ing (except  important  iron  or  steel  bridges)  and  ties, 
it  was  not  difficult  for  a  meritorious  enterprise  to  ob- 


PROMOTION  59 

tain  money  for  the  important  bridges,  track  super- 
structure— rails,  fastenings  and  switches — and  for 
the  motive  power  and  rolling  stock  to  operate  it. 

The  wealthier  members  of  the  local  community 
had  either  large  holdings  of  land  or  controlled  the 
conduct  of  the  larger  business  interests,  which  were 
certain  to  be  very  greatly  benefited  by  the  railroad — 
in  some  cases  their  value  would  be  more  than  dou- 
bled immediately  after  the  lines  were  placed  in  oper- 
ation. In  so  far  as  their  assets  or  credit  permitted,  it 
was  a  good  business  proposition  to  make  the  utmost 
possible  sacrifice  to  obtain  the  improvement,  even 
if  it  did  not  in  itself  pay  a  return  on  the  investment 
or  proved  eventually  a  partial  or  complete  loss.  (In 
very  many  instances  it  did  involve  a  complete  loss 
for  the  original  local  investors,  so  far  as  the  railroad 
investment  itself  was  concerned.) 

It  will  be  noted  that  the  grading  and  the  timber 
for  bridges,  culverts  and  ties  and  what  payments 
were  required  for  land,  did  not  involve  the  sending 
of  money  outside  of  their  own  district,  as  local  labor 
and  resources  provided  them. 

With  these  items  of  construction  provided  for,  the 
risk  of  the  outside  capital  was  very  much  reduced, 
particularly  if  the  local  subscribers'  investment  was 
represented  by  stock  and  the  outside  investment  by 
bonds,  with  a  bonus  of  stock — which  was  a  very 
usual  condition.  It  will  be  noted,  too  that  the  con- 
tingencies of  construction  which  may  be  large  in 
real  estate,  grading  and  bridging,  are  remote  in  such 
items  as  bridge  superstructure,  track  and  equipment. 

The  bonds  were  secured  by  the  real  estate,  the 
grading,  a  larger  part  of  the  bridging  and  the  ties, 
for  which  no  bonds  were  issued,  and  by  the  rail  and 
equipment  for  which  bonds  were  issued.  The  bonds, 
therefore,  had  a  relatively  large  value  of  physical 
property  as  security  and  hence  a  reasonable  margin 


60  VALUATION  AND  RATES 

of  safety,  and  their  owners  an  interest  in  prospective 
profits,  through  their  holdings  of  the  stock  bonus. 
Further,  the  enterprise  was  protected  from  hostile 
local  legislation,  to  which  foreign  capital  is  some- 
times subjected,  by  reason  of  the  local  interest  in  the 
profits  of  the  enterprise. 

If  the  promoter  could  obtain  through  state, 
county,  city  or  township  aid,  the  entire  amount 
which  the  bond  investor  would  not  supply,  his  task, 
though  large,  was  confined  within  definite  limits  and 
consisted  in  convincing  the  several  communities  of 
the  merits  and  importance  to  themselves  of  the  en- 
terprise. Such  aid  often  had  to  be  supplemented  by 
individual  subscription,  which  involved  an  immense 
amount  of  personal  work  and  long  delays. 

State,  city  and  county  aid  are  now  generally  for- 
bidden by  statute  in  the  various  states,  and  wisely 
so;  for  the  greater  part  of  the  time  during  which 
such  aid  was  given,  however,  it  was  beneficial  and 
wise  legislation,  the  abuses  which  finally  discredited 
it  being  assignable  rather  to  lack  of  proper  super- 
vision in  extending  the  aid  than  to  anything  inher- 
ently wrong  in  the  principle  as  applied  to  a  coun- 
try urgently  in  need  of  transportation. 

With  variations  to  meet  local  conditions,  this  plan 
was  very  generally  followed  in  much  of  the  early 
construction — in  fact,  was  the  only  practicable  one 
by  which  so  large  an  area  could  have  been  devel- 
oped within  the  time  in  which  it  was  accomplished. 
Usually,  extensions  to  the  lines  so  constructed  were 
then  made  as  first  outlined  above. 

Cost  of  Promotion 

The  actual  cost  of  promotion  is  seldom  obtainable. 
In  fact,  it  may  be  anything  from  a  fraction  of  one 
per  cent  to  twelve  per  cent  of  construction  cost.  In 
estimates  of  physical  valuation  it  is  generally  in- 


PROMOTION  61 

eluded  as  a  part  of  the  "General  Expenditure"  item, 
which  latter  item  is  stated  as  a  percentage  of  total 
cost,  without  any  specific  amount  or  percentage  be- 
ing assigned  to  promotion  separately.  A  few  known 
instances  may  be  of  interest,  although  they  have  no 
general  application.  The  promotion  costs  next  given 
cover  all  expenses  ready  to  let  construction  con- 
tracts. 

The  cost  of  promoting  a  line,  170  miles  in  Illinois, 
through  a  good  agricultural  country,  under  consid- 
eration for  three  years,  was  one  and  one-half  per 
cent  of  estimated  construction-  cost  of  railroad  and 
equipment. 

The  promotion  expenses  on  the  K.  C.  M.  &  O. 
R.  R.,  610  miles  long,  from  Wichita,  Kas.,  to  Fort 
Sill,  Tex.,  exceeded  10%  of  the  construction  cost. 

The  promotion  expenses  of  a  twenty-five  mile  line 
in  Wisconsin  was  less  than  one  per  cent  of  its  esti- 
mated total  cost. 

Acworth,  the  English  authority,  in  "Railway  Eco- 
nomics," states  that  the  probable  cost  to  English 
railroads  for  promotion  has  been,  as  an  average, 
$20,000  per  mile.  This  covers  the  cost  of  parlia- 
mentary and  all  other  proceedings  preliminary  to 
construction. 

Element  of  Risk  in  Promotion 

By  far  the  larger  part  of  the  railroads  which  have 
been  promoted  have  never  gotten  any  further  than 
the  promotion  stage.  To  say  what  proportion  of  the 
roads  promoted  have  actually  been  constructed 
would  be  hazarding  a  guess,  for  there  is  no  record 
covering  the  matter.  We  have  now  in  the  country 
something  over  250  thousand  miles  of  railroad,  and 
it  is  safe  to  say  that  certainly  more  than  four  times 
that  mileage  has  been  promoted. 


62  VALUATION  AND  RATES 

A  reference  to  the  files  of  the  "Engineering  News" 
and  other  such  papers,  which  record  weekly  what 
is  termed  "Construction  News,"  but  which  is  oftener 
"Promotion  News,"  will  disclose  how  many  rail- 
road enterprises  relatively  get  to  the  actual  con- 
struction stage. 

During  the  period  of  active  railroad  construction, 
extending  from  1880  to  1907,  several  pages  of  the 
periodical  mentioned  were  covered  by  short  an- 
nouncements concerning  proposed  railroads  which 
were  under  survey  preparatory  to  submitting  them 
for  the  purpose  of  financing.  The  same  pages  con- 
tained notices  of  contracts  for  railroad  construction 
work  which  had  been  awarded.  The  promotion  no- 
tices during  the  period  mentioned  were  certainly  as 
high  as  ten  to  one  of  actual  construction. 

This  statement  is  not  made  for  the  purpose  of 
establishing  an  absolute  or  definite  percentage 
which  has  existed  between  promoted  and  con- 
structed railroads,  but  only  to  make  clear  that  the 
number  of  promoted  railroads  has  exceeded  the 
number  of  constructed  railroads  many  times. 

The  practical  application  of  this  fact  is,  that  pro- 
motion instead  of  being  very  profitable,  has  been, 
as  a  business,  very  unprofitable,  even  though  in 
some  instances  individuals  have  made  some  money 
out  of  it.  As  a  corollary  of  this,  the  chance  of  loss 
of  money  invested  in  promoting  railroads  is  very 
large  indeed — perhaps  as  great  as  for  money  in- 
vested in  prospecting  for  minerals  under  expert 
advice. 

Many  railroad  enterprises  which  have  survived 
the  promotion  stage  have  been  constructed  to  the 
extent  of  providing  a  roadbed  and  the  smaller 
bridges  for  the  track,  on  which  no  track  has  ever 
been  laid.  This  class  of  abandoned  railroad  con- 
struction is  scattered  all  over  the  country,  in  the 


PROMOTION  63 

central,  southern,  and  eastern  states.  Some  of  these, 
particularly  in  mountainous  districts,  have  involved 
the  expenditure  of  large  sums  of  money.  Today 
these  expenditures  are  represented  only  by  a  scar  on 
the  landscape— a  nuisance  obstructing  beneficial 
use  of  the  land.  They  serve  as  an  enduring  illus- 
tration of  the  fact  that  availability  of  capital  is  the 
controlling  factor  in  the  construction  of  new  rail- 
roads, and  that  money  invested  in  them  is  subject 
to  a  very  large  element  of  risk. 

Summary   of   Promotion 

From  the  foregoing  relation  we  may  summarize 
the  prominent  facts  and  conditions  relating  to  the 
promotion  of  railroads : 

(1)  The  difficulties  and  expense  of  promotion 
are  proportional  to  the  risk  involved  in  the  enter- 
prise, being  much  greater  on  new  lines  than  in  the 
extension  of  existing  operated  lines. 

(2)  The  very  large  element  of  risk  involved  in 
operating  new  railroads  is  recognized  in  recent  con- 
tracts of  the  Canadian  Government  covering  a  large 
mileage,  these  contracts  being  based  on  the  prem- 
ise that  the  revenues  of  the  roads  for  a  period  of 
from  seven  to  ten  years  will  not  exceed  the  oper- 
ating expense — the  interest  on  the  investment  mean- 
time  being   assummed  by  the   government.     This 
supports  the  statement  that  the  original  investors 
in  railroads  in  the  United  States  have  very  gener- 
ally lost  a  large  part  of  the  interest  on  their  in- 
vestments and  often  all  of  their  investments  as  well. 

(3)  The  element  of  risk  attending  the  exten- 
sion of  existing  operated  roads  is  less  than  in  the 
case  of  new  roads.   Extensions  of  existing  operating 
roads,  involving  the  construction  of  several  hundred 
miles  of  line  at  one  time,  have  invariably  been  dis- 


64  VALUATION  AND  RATES 

astrous,  as  the  records  of  the  Atchison,  Topeka  & 
Santa  Fe,  Union  Pacific,  Northern  Pacific  and  Cana- 
dian Pacific  show. 

(4)  Promotion  is  a  valuable  service  rendered  in 
supplying  an  urgent  public  need.     It  is  real  work, 
of  an  expert  character,  demanding  exceptional  qual- 
ifications.    It  must   provide   many   definite   things, 
such  as  obtaining  a  charter,  franchises  for  the  use 
of  streets,  roads,  and  other  public  places;  an  ac- 
curate survey  of  the  entire  country  to  be  traversed, 
and  a  definitely  located  line,  with  maps,  profiles,  and 
estimates  of  cost;  a  large  amount  of  statistical  data 
relating  to  probable  traffic  which  must  be  gathered 
in  the  territory  to  be  served,  tabulated,  and  properly 
interpreted.     All  of  this  work  must  be  performed 
by  trained  men,  expert  in  their  particular  lines. 

(5)  Money   must   be    provided   for   performing 
these  several  services;  the  preliminary  expense  of 
obtaining  the  charter  and  forming  a  legal  organiza- 
tion ;  the  cost  of  making  the  surveys,  which  involves 
the  employment  of  large  forces  of  field  and  office 
men,  and  the  payment  of  the  cost  of  securing  traffic 
data  in  the  field,  of  compiling  it  in  the  office,  and 
of  analyzing  it  by  a  traffic  expert.     In  the  aggregate 
these  expenses  may  be  anything  between  1%%  and 
12%  of  the  cost  of  constructing  the  line,  the  ordinary 
cost  being  near  the  lowest  stated. 

(6)  In  connection  with  the  reliability  of  the  data 
prepared  for  promotion  purposes   (this  affects  the 
matter  of  procuring  capital),  the  contingencies  at- 
tending construction  are  known  to  be  many,  and  this 
knowledge  tends  to  cast  doubt  on  the  reliability  of 
the  estimates  of  the  engineer  as  to  cost.     The  nature 
of  the  work,  the  construction  of  bridge  foundations, 
erecting  large  spans  over  deep  rivers  with  treach- 
erous bottoms,  the  large  slides,  the  almost  certain 
washouts  during  construction  or  early  operation  for- 


PROMOTION  65 

bid  an  accurate  determination  of  cost  in  advance  of 
actual  construction.  Even  with  the  most  expert  as- 
sistance and  close  analysis,  the  estimate  of  traffic 
expectancy  of  the  line  contains  many  elements  of 
uncertainty.  The  cost  of  the  required  real  estate 
and  the  delays  incident  to  acquiring  it  may  not  be 
known  in  advance  with  any  exactness.  That  is,  the 
estimates  of  cost,  even  under  the  most  favorable  cir- 
cumstances, are  uncertain  and  based  on  judgment 
largely. 

(7)  It  follows  from   (6)  that  an  investment  in 
new  railroads  must  be  based  largely  on  faith.     It  is 
difficult  to  procure  capital  on  that  basis  and  the  re- 
turn on  the  capital  must  be  large  indeed  to  justify 
the  investment. 

The  securities  of  new  railroads  in  consequence 
have  seldom  been  underwritten,  except  as  to  a  small 
percentage  of  the  total,  by  bankers.  The  capital 
has  been  secured  from  local  investors  and  through 
aid  granted  by  municipalities  and  states.  Such  in- 
vestment and  aid  have  been  based  on  the  benefits 
to  be  derived  from  the  operation  of  a  transportation 
facility  and  not  on  the  basis  of  anticipated  monetary 
return  on  the  investment  itself. 

Securing  capital  from  such  diverse  sources  re- 
quired much  work  and  time,  and  necessitated  the 
employment  of  men  of  exceptional  qualifications. 

(8)  The  rewards  of  promotion  have  not  been 
great  to  the  promoters  themselves  as  a  whole,  though 
they  have  been,  in  exceptional  cases,  profitable  to 
individual  (or  groups  of  individuals)  promoters. 


CONSTRUCTION-RECONSTRUCTION 

Engineering 

When  construction  of  a  proposed  railroad  is  de- 
cided upon,  it  will  be  carried  out  under  one  of  the 
three  plans  described  later  in  this  chapter.  What- 
ever method  is  employed  the  Constructing  Engineer 
will  have  entire  charge  of,  and  responsibility  for  the 
construction  of  the  work. 

It  will  be  divided  into  sections  called  residencies, 
varying  usually  from  8  to  15  miles  in  length,  accord- 
ing to  the  nature  of  the  work.  Each  of  these  sec- 
tions will  be  assigned  to  a  Resident  Engineer,  who 
will  have  immediate  charge  of  all  construction.  In 
cases  where  the  length  of  the  proposed  line  re- 
quires it,  these  Resident  Engineers  will  report  di- 
rectly to  Division  Engineers,  who  in  turn  report  to 
the  Chief  Engineer. 

The  Resident  Engineers  "cross  section"  the  line 
to  determine  the  quantities  of  grading,  place  stakes 
marking  the  edges  of  excavations  and  "toes"  of  em- 
bankments, indicate  on  the  ground  by  stakes  the  di- 
mensions of  all  structures  such  as  culverts,  bridges 
and  trestles,  and  mark  the  lines  of  the  right  of  way. 
They  supervise  all  of  the  construction  as  it  pro- 
gresses, note  classification  of  excavations,  examine 
and  give  directions  as  to  bridge  foundations,  ma- 
sonry, pile  driving,  timber  framing,  and  all  other 
construction  work.  Once  each  month  they  make  an 
estimate  of  the  quantities  of  work  done  by  each  con- 
tractor, which  is  the  basis  of  the  monthly  payment 
to  him. 

Standards  of  Construction 

In  the  office  of  the  Chief  Engineer,  standard  plans 
for  the  construction  of  all  classes  of  excavations,  em- 


CONSTRUCTION-RECONSTRUCTION        67 

bankments,  tracks  and  structures  are  prepared,  as 
well  as  plans  for  structures  requiring  special  consid- 
eration. 

The  standards  of  construction  will  be  determined 
with  due  regard  to  the  character  of  the  proposed 
road.  If  the  line  is  designed  as  a  through  line  of 
probable  heavy  traffic,  evidently  the  standards  of 
construction  will  be  much  higher  than  for  branches 
or  lines  of  light  traffic. 

For  new  companies,  the  available  capital  will  be 
the  controlling  factor  in  determining  the  character 
of  construction  standards.  With  such  lines  in  the 
past,  it  has  oftener  been  a  question  of  whether  a 
line  could  be  constructed  at  all  with  the  available 
capital,  rather  than  what  kind  of  a  road  was  to  be 
constructed. 

In  the  case  of  extensions  of  operating  roads,  the 
standards  of  the  operated  line  will  be  followed  to 
secure  uniformity  of  operating  conditions,  altered,  of 
course,  where  experience  has  shown  such  changes 
to  be  desirable. 

In  either  case  the  general  condition  is,  that  much 
time  will  be  required  to  develop  a  traffic  sufficient 
to  meet  the  charges  and  expenses  after  the  con- 
struction has  been  completed.  Due  regard  for  the 
interests  of  both  the  bondholders  and  the  operating 
company  usually  requires  that  the  road  be  put  into 
operation  for  the  least  possible  expenditure  of 
money. 

The  limit,  of  course,  is  that  these  economies  of 
construction  must  not  unduly  handicap  the  road 
after  it  has  been  placed  in  operation.  To  so  design 
the  location  and  construction  that  its  economies  do 
not  go  so  far  on  the  one  hand  that  the  cost  of  op- 
eration is  excessive,  and  still  conserve  the  interest 
of  the  original  investors  on  the  other,  demands  the 


68  VALUATION  AND  RATES 

highest  sort  of  engineering  skill  and  business  judg- 
ment. 

Gould  Extensions  in  Pittsburgh  District 

The  extensions  of  the  Gould  System  into  the  Pitts- 
burgh District,  by  means  of  the  Wabash  Pittsburgh 
Terminal  from  the  west  on  the  one  hand,  and  the 
extension  of  the  Western  Maryland  from  the  east 
on  the  other,  is  a  recent  example  of  the  great  im- 
portance of  availablity  of  capital  in  connection  with 
the  construction  of  all  new  railroads,  including  the 
extension  of  well-established  large  systems. 

The  Gould  System  of  roads,  comprising  the 
Wabash,  the  Missouri  Pacific,  Denver  &  Rio  Grande, 
Cotton  Belt,  International  Great  Northern,  Texas 
&  Pacific,  and  other  southwestern  lines,  acquired 
control  of  the  Wheeling  &  Lake  Erie  Railroad  in 
1901.  This  brought  the  system  within  sixty  miles 
of  Pittsburgh,  the  greatest  tonnage-producing  cen- 
ter in  the  United  States.  In  1902  the  Western  Mary- 
land, which  reached  inland  from  tide  water  at  Bal- 
timore, was  acquired. 

The  construction  of  the  two  gaps  in  the  Pitts- 
burgh district,  and  of  the  Western  Pacific  from 
Salt  Lake  City,  Utah,  to  San  Francisco,  would  have 
made  this  the  only  system  in  the  United  States  un- 
der one  control,  extending  completely  across  the 
country  from  the  Atlantic  to  the  Pacific  Ocean. 

There  was  enough  guaranteed  traffic  from  the 
Pittsburgh  district,  which  was  assured  by  contracts 
with  certain  steel  corporations  located  therein,  to 
assure  a  return  on  the  money  spent  in  constructing 
the  two  extensions  into  that  district. 

The  territory  to  be  traversed  by  the  extensions 
was  very  rugged  and,  as  the  tonnage  to  be 
hauled  was  large,  it  required  that  the  standards 
of  the  road  should  be  high,  particularly  as  to  grades 


CONSTRUCTION-RECONSTRUCTION        69 

and  curvature.  The  cost  of  right  of  way  and  of 
real  estate  for  terminal  purposes  within  the  city  of 
Pittsburgh  was  necessarily  very  large. 

The  Pennsylvania,  Baltimore  &  Ohio  and  the 
Pittsburgh  &  Lake  Erie  Railroads,  theretofore  had 
practically  controlled  the  entire  traffic  of  this  dis- 
trict, and  in  consequence  the  proposed  extensions 
of  another  system  aroused  their  active  opposition. 
The  largest  financial  institutions  of  the  country  are 
heavily  interested  in  the  securities  of  these  latter 
roads,  and  the  proposed  invasion  of  their  territory 
by  the  Gould  System  caused  them  to  actively  oppose 
the  plans  for  financing  these  extensions.** 

In  spite  of  the  fact  that  the  traffic  for  the  new 
line  was  assured  in  advance,  its  amount  and  nature 
definitely  known,  and  the  further  fact  that  the 
financing  was  based  on  the  credit  of  a  system  which 
had  been  in  operation  for  many  years,  sufficient 
capital  was  not  found  to  complete  the  construction 
of  these  proposed  lines,  and  those  who  had  invested 
their  money  in  the  undertaking  suffered  large 
losses. 

Expedients   for   Reducing    Construction   Cost 

Savings  in  construction  cost  are  effected  princi- 
pally by  the  following  expedients: 

(1).  By  employing  "stiff"  grades — that  is,  a 
grade  having  a  large  ratio  of  vertical  rise  to  dis- 
tance— the  surface  of  the  ground  can  be  more 
nearly  followed  by  the  grade  line  than  where  easy 


**There  is  nothing  reprehensible  in  the  opposition  of  the  oper- 
ating roads,  and  the  financiers  associated  with  them,  under  the 
conditions  related;  the  same  policy  of  opposition  would  have  been 
adopted  by  commercial  or  industrial  corporations  similarly  cir- 
cumstanced. The  position  of  the  roads  occupying  the  territory,  in 
such  instances,  is  that  the  proposed  invasion  simply  results  in  a 
duplication  of  existing  facilities,  which  are  adequate  to  meet  all 
reasonable  transportation  demands  of  the  district  served. 


70  VALUATION  AND  RATES 

grades  are  employed.  The  principal  items  affected 
by  this  expedient  are  Graduation  and  Bridging. 
The  following  illustrations  will  serve  to  show  the 
extent  to  which  these  two  items  may  be  affected 
by  an  alteration  in  the  maximum  gradients: 

A  through  line  170  miles  in  length  projected 
through  a  rolling  prairie  country  on  grades  of  0.4% 
north  bound  and  0.6%  south  bound  was  surveyed 
and  the  estimates  for  the  cost  of  construction  made 
thereon.  The  construction  of  the  line  was  not  un- 
dertaken for  various  reasons. 

Two  of  the  towns  situated  along  this  abandoned 
survey  line,  25  miles  distant  from  each  other,  con- 
ceived the  idea  of  constructing  a  local  branch  line 
to  better  their  transportation  facilities.  A  survey 
over  the  same  ground  as  that  occupied  by  the 
through  line  was  made,  using  gradients  of  1.5%  in 
both  directions. 

The  estimated  cost  on  the  through  line  for  grad- 
ing per  mile  was  $4,215  and  for  bridging  $1,470. 
On  the  local  branch  line,  the  estimated  costs  were, 
for  grading  $1,400  and  for  bridging  $400,  the 
larger  part  of  the  difference  in  cost  being  attributa- 
ble to  the  saving  effected  by  the  use  of  the  stiffer 
grade,  a  smaller  part  being  accounted  for  by  the 
difference  in  area  of  the  proposed  cross-section  of 
excavations  and  embankments. 

In  a  very  hilly  country  a  survey  was  made  to  de- 
termine the  relative  economy  of  making  the  con- 
trolling gradient  0.3%  in  both  directions  on  the  one 
hand,  or  0.4%  north  bound  and  0.6%  south  bound 
on  the  other.  The  estimated  cost  of  the  line  using 
the  0.3%  gradient  was  $63,800  per  mile;  of  the 
0.4%-0.6%  line  $54,600  per  mile,  the  cost  of  the 
equipment  not  being  included  in  either  case. 

(2).  In  prairie  or  comparatively  flat  country,  the 
employment  of  curvature  will  not  usually  effect  a 


CONSTRUCTION-RECONSTRUCTION        71 

saving  of  any  great  amount.  In  a  hilly  or  moun- 
tainous country,  however,  curvature  may  be  em- 
ployed to  effect  a  very  considerable  saving  in  con- 
struction cost. 

Where  the  grade  line  of  a  railroad  is  supported 
between  the  ridge  at  the  top  and  the  valleys  at  the 
bottom,  in  passing  from  one  valley  over  a  ridge  into 
the  other,  it  frequently  is  located  on  steep  slopes 
and  the  turns  are  in  many  cases  very  abrupt.  This 
necessitates  sharp  curvature  to  avoid  expensive 
grading. 

On  many  railroads,  if  the  grade  line  is  to  ap- 
proximate the  contour  of  the  surface,  a  large  num- 
ber of  sharp  curves  are  absolutely  essential,  even  on 
the  most  important  of  trunk  lines,  to  make  the  con- 
struction of  the  line  economically  possible.  For 
branch  lines  traversing  such  districts,  where  the  an- 
ticipated traffic  is  not  large,  many  of  them  can  not 
be  considered  at  all,  unless  extremely  sharp  curves, 
and  a  large  number  of  them,  are  used. 

(3) .  The  cost  of  the  construction  will  be  affected, 
to  a  considerable  extent,  by  the  widths  of  the  fin- 
ished excavations  and  embankments.  During  much 
of  the  earlier  construction,  the  standards  were  usu- 
ally about  as  follows : 

In  earth  excavation,  16  ft.  base,  with  slopes  of 
1:1 — that  is,  1  foot  horizontal  to  each  foot  vertical 
depth. 

In  rock  excavation,  14  ft.  base,  slopes  %  to  1. 

On  embankments,  14  ft.  base,  slope  11/2  to  1. 

On  important  lines,  the  standards  of  construction 
today  are  usually  about  as  follows : 

In  earth  excavation,  base  26  ft.,  slope  1V2  to  1. 

In  rock  excavation,  base  24  ft.,  slope  *4  to  1. 

On  embankments,  base  20  ft.,  slope  iy%  to  1. 

It  will  be  readily  seen  from  these  dimensions,  that 
the  quantities  of  grading  may  be  varied  to  a  con- 


72  VALUATION  AND  RATES 

siderable  extent  by  the  adoption  of  different  stand- 
ard cross-sections. 

(4)  Saving  of  cost  in  original  construction  may 
be  made  by  constructing  as  much  of  the  bridging  as 
possible  in  a  temporary  manner.  As  to  a  large  part 
of  it,  even  where  the  line  is  of  considerable  impor- 
tance, it  is  usually  economical  to  construct  temporary 
timber  trestles,  at  the  time  of  original  construction, 
although  masonry  and  steel  structures  are  contem- 
plated for  the  future. 

On  a  new  line  the  cost  of  transporting  by  wagon 
the  sand,  cement,  stone,  and  steel  required  for 
bridges  is  a  very  large  part  of  their  total  cost.  A 
cubic  yard  of  masonry  weighs  more  than  two  tons, 
and  wagon  transportation  will  cost  usually  between 
thirty  and  fifty  cents  per  ton-mile.  Suitable  sand 
and  stone  are  seldom  found  near  the  bridge  sites — 
in  many  instances  not  even  in  the  construction  dis- 
trict. In  practically  all  cases  cement  and  steel  are 
shipped  in  by  other  railroads,  and  unless  the  line 
closely  parallels  an  existing  railroad  the  hauls  are 
long. 

The  plan  usually  followed  is  to  build  a  temporary 
structure  of  timber,  replacing  the  timber  structure 
with  the  permanent  structure  at  the  time  the  tem- 
porary one  would  otherwise  be  renewed.  The  bulky 
materials  of  the  permanent  structure  may  then  be 
hauled  by  train  to  the  bridge  site  at  a  cost  of  about 
%  cent  per  ton-mile.  The  cost  of  using  timber  piers 
under  100-foot  spans,  of  moderate  height,  is  about 
35%  of  the  cost  of  masonry  piers. 

A  comparison  of  vitrified  tile  pipe  with  cast  iron 
pipe,  for  small  culverts,  shows  comparative  costs  as 
follows : 


CONSTRUCTION-RECONSTRUCTION        73 

*  Comparative  Cost  of  Pipe  Lineal  Foot 

Diameter 

of  Pipe.  Cast  Iron.             Vitrified  Tile. 

12"  $1.31  $0.75 

18"  2.92  1.10 

24"  4.37  1.45 

30"  5.83  2.00 

36"  7.87  3.75 

It  will  be  seen  from  this  that  very  considerable 
saving  may  be  made  by  employing  temporary  struc- 
tures in  the  original  construction  of  bridges  and 
culverts. 

(5).  Ordinarily,  on  new  lines,  all  of  the  build- 
ings, such  as  passenger  stations,  freight  sheds,  en- 
gine houses,  machine  shops,  and  store  rooms,  are 
frame  structures  of  cheap  construction,  and  the 
fewest  number  possible  to  conduct  the  business  are 
built. 

(6).  As  the  traffic  for  new  lines  is  usually  light 
for  the  years  immediately  following  the  construc- 
tion, a  comparatively  light  track  is  used. 

In  the  case  of  the  extension  of  operated  lines,  it 
is  customary  to  use  what  is  termed  "relayer"  rail, 
that  is,  rail  which  has  been  used  in  the  main  line 
and  has  become  too  much  worn  for  that  class  of 
traffic,  but  which  is  good  enough  for  use  on  lines 
of  less  traffic.  One  particular  purpose  in  using  this 
"relayer"  rail  is  to  avoid  the  "kinking"  of  new  rail, 
as  all  of  the  grading  will  be  undergoing  a  process 
of  shrinkage  and  settlement  during  the  eight  years 
(usually)  following  the  construction  of  the  road. 

(7).  In  the  matter  of  sidings  at  local  stations 
and  of  passing  tracks  for  the  operation  of  single 
track  lines,  the  business  being  light  and  the  trains 

*Cost  affected  by  length  of  haul. 


74  VALUATION  AND  RATES 

in  consequence  few,  the  construction  will  be  limited 
to  bare  necessities. 

(8).  Unless  the  constructed  line  is  a  very  im- 
portant one,  and  will  carry  a  large  traffic  imme- 
diately after  its  construction,  the  track  is  ballasted 
with  earth  from  the  side  of  the  track. 

Ballast  placed  upon  a  new  grade  undergoing  the 
shrinkage  heretofore  mentioned,  will  disappear  in 
a  short  time  within  the  embankments  upon  which  it 
is  placed.  It  is  therefore  not  economical  to  place 
expensive  stone  or  gravel  ballast  on  new  roads  for 
at  least  three  or  four  years  after  their  completion. 

(9).  In  the  matter  of  road  crossings,  that  is,  the 
crossing  of  the  line  of  the  railway  by  public  high- 
ways and  private  roads,  the  traffic  on  newly  con- 
structed roads  being  light  and  the  trains  in  conse- 
quence comparatively  infrequent,  the  danger  of  ac- 
cidents at  such  crossings  is  very  much  less  than  on 
busy  main  lines.  The  separation  of  the  grade  of 
the  highway  from  that  of  the  railroad  is  generally 
a  very  expensive  matter,  as  will  be  shown  in  the 
following  pages,  and  to  avoid  it,  crossings  are  made 
at  grade  wherever  possible. 

The  same  conditions  exist  at  points  where  the 
new  line  crosses  other  railroads.  Formerly  railroads 
crossed  each  other  at  grade,  or  not,  as  they  were 
able  to  make  agreements  with  each  other;  for  the 
last  twenty  years,  however,  the  state  commissions 
have  in  most  instances  compelled  a  separation  of 
grades  in  original  construction  at  points  where  rail- 
roads cross  each  other. 

(10) .  On  account  of  the  infrequent  train  service, 
there  will  be  no  large  expenditure  for  signals;* 


*Moving  signals;  such  fixed  signals  as  "whistle,"  "road-cross- 
ing," etc.,  will  be  practically  the  same  on  the  new  as  the  older 
road.  These  latter  are  unimportant  as  to  cost. 


CONSTRUCTION-RECONSTRUCTION        75 

about  the  only  signals  required  being  those  at  tele- 
graph stations  and  drawbridges. 

(11).  The  character  of  the  track  and  of  the 
bridges  heretofore  mentioned,  together  with  the 
light  traffic,  require  the  use  of  comparatively  light 
engines,  and  the  expenditure  for  equipment  is  in 
consequence  much  less  than  will  be  required  when 
the  traffic  has  grown. 

(12).  The  yards  at  intermediate  stations  and 
at  terminals  will  for  the  same  reason — light  traffic — 
be  much  smaller  than  the  increased  traffic  will  later 
demand. 

All  of  these  expedients  for  keeping  the  cost  of 
the  original  construction  at  the  minimum  are  justi- 
fiable from  an  economic  standpoint.  Most  of  the 
criticism  of  the  original  location  and  construction 
of  the  earlier  periods  is  not  justified  when  the  actual 
conditions  obtaining  at  the  time  of  original  construc- 
tion are  considered.  It  is  repeated  here  that  the 
availability  of  capital  and  the  time  required  to  de- 
velop the  business  of  new  lines  are  absolutely  con- 
trolling factors  in  new  railroad  construction. 

All  new  lines  should  of  course  be  located  and 
constructed  with  the  view  of  eventual  change  when 
the  traffic  density  has  increased  to  the  extent  of 
justifying  the  additional  expenditure.  At  points 
where  the  cost  of  original  construction  is  heavy, 
however,  it  will  be  expedient  very  often  to  avoid 
the  construction  of  tunnels  and  other  expensive 
work  by  adopting  a  temporary  line,  using  higher 
gradients  than  are  controlling  on  other  parts  of  the 
line. 

While  the  operating  expense  will  be  increased 
on  account  of  "doubling  the  hill"  or  of  the  pusher 
service  required  at  such  points,  the  financial  condi- 
tions will  generally  be  such  as  to  force  the  adoption 
of  the  temporary  line  costing  less  to  construct. 


76  VALUATION  AND  RATES 

Estimates    of    Construction    Cost 

The  following  illustrations  will  serve  to  give  the 
comparative  costs  per  mile  of  newly  constructed 
railroads,  in  districts  with  varying  topographical 
characteristics : 

For  a  proposed  railroad  in  the  rolling  prairie  coun- 
try of  the  north  central  states,  170  miles  in  length, 
with  controlling  grades  of  .04-.06,  connecting  two 
large  systems  of  operated  railroads,  the  estimated 
costs**  per  mile  were  as  follows: 


(Estimate  A)  Cost  per  mile. 

Graduation  $  4,129 

Bridging  and  Culverts 920 

Track 7,450 

Ballast 1,500 

Miscellaneous 1,569 

Administration,    Interest,    Engi- 
neering         1,750 

Real  Estate 1,000 

Equipment    5,000 


$23,318  100.0 

The  column  showing  the  percentage  of  each  item 
to  the  total  will  indicate  the  relative  importance  of 
any  particular  item. 

The  following  estimate  of  cost  of  construction 
was  made  from  surveys  for  a  line  25  miles  in  length 
in  a  very  hilly  country  in  southwestern  Wisconsin. 
The  line  was  to  be  operated  as  a  branch  line  of  an 
operated  road,  designed  to  serve  a  city  of  5,000 
population  and  a  large  number  of  small  zinc  mines : 

**None  of  these  estimates  include  bankers'  commissions  and 
discounts,  which  are  always  a  large  percentage  of  construction 
costs. 


CONSTRUCTION-RECONSTRUCTION        77 

(Estimate  B)  Cost  per  Mile. 

Graduation    $  7,382 

Bridging  and  Culverts 3,561 

Track 5,782 

Miscellaneous    1,568 

Real  Estate 2,424 

Administration,  Interest,  Engi- 
neering    1,105 

Equipment 1,963 


$23,785 


It  will  be  noted  that  the  cost  per  mile  of  this 
branch  line,  through  a  hilly  country,  was  practically 
the  same  as  for  the  through  line  in  a  rolling  prairie 
country.  If  the  standards  of  grades,  track  and 
other  construction  had  been  the  same  for  this  branch 
line  as  for  the  one  first  estimated,  the  cost  would 
probably  have  been  between  two  and  three  times 
that  given  in  Estimate  B. 

The  following  estimate  of  cost  of  construction 
is  for  a  line  37  miles  in  length  in  a  hilly  country, 
designed  to  be  operated  as  a  through  line,  carrying 
a  large  traffic: 


(Estimate  C)  Grade 

Grade  0.3%     0.4-0.6% 

Distance 36.5  miles     37.0  miles 

Earth  Excavation  base  26'-lV2  •!  slope 
Embankment  base  20'-l!/2  -1  slope 
Bridging-Concrete  Masonry 
Track  80  Ib. — ballasted 


78  VALUATION  AND  RATES 

Grade 

Grade  0.3%     0.4-0.6% 
Cost  Per  Mile. 

Grading $42,363       $32,190 

Bridging 4,301  5,840 

Track 9,267  9,267 

Minor  Structures ..         866  855 

Terminals 2,466  2,432 

Real  Estate 1,000  1,000 

Overhead   Expense     3,556  3,042 


*$63,819     *$54,626 

*Does  not  include  equipment. 

In  comparing  the  estimate  for  the  line  shown  in 
Estimate  C,  it  should  be  noted  that  it  does  not  in- 
clude equipment,  as  do  the  preceding  estimates. 
Note  the  large  increase  in  cost  which  the  perma- 
nent character  of  the  construction  and  low  grade 
require. 

The  estimated  construction  cost  of  the  Kansas 
City,  Mexico  &  Orient  from  Kansas  City  to  the 
Rio  Grande  River  in  Texas,  amounting  in  the  aggre- 
gate to  1,194  miles,  was  as  follows: 

(Estimate  D)  Cost  Per  Mile. 

All  items  of  Roadway* $19,526 

Equipment 4,381 

General  Expenditure   .......     2,793 


""Includes  real  estate. 


$26,700 


This  road  traversed  a  comparatively  flat  country 
through  the  states  of  Kansas,  Oklahoma  and  Texas. 
It  covers  the  actual  costs  of  over  600  miles  of  line, 
with  the  estimated  cost  to  complete  the  balance. 
It  includes  a  double  track  belt  line  at  Kansas  City, 
Kansas,  which  has  been  constructed,  but  not  as 
yet  placed  in  operation.  It  is  a  fair  average  of  the 
first  cost  of  lines  of  its  character  in  the  southwest. 


CONSTRUCTION-RECONSTRUCTION        79 
Additions    to   Cost   of   Original   Construction 

At  the  time  a  railroad  is  completed  and  first 
placed  in  operation,  which  usually  begins  with  a 
few  comparatively  light  trains,  it  is  by  no  means 
sufficient  to  serve  the  needs  of  even  a  moderate 
traffic.  In  addition  to  the  current  maintenance  and 
repairs  of  roadway  and  structures,  there  will  be 
certain  small  extensions  of  facilities  and  betterments 
which  will  usually  be  constructed  by  the  company 
without  increasing  the  capitalization. 

These  additions  to  the  cost  of  first  construction 
are  very  apparent  when  a  physical  valuation  of  a 
railroad  property  is  made.  In  ascertaining  the 
actual  cost  from  the  records  of  1,645  miles  of  the 
Northern  Pacific,  in  the  State  of  Washington,  which 
was  determined  to  be  $75,458,000,  it  was  found 
that  $8,848,000*  of  the  total  amount  had  been  ex- 
pended since  the  completion  of  the  original  con- 
struction. 

In  comparing  such  estimates  as  those  given  above, 
which  are  original  construction  costs,  with  lines 
which  have  been  in  operation  for  some  time,  this 
fact  must  be  kept  in  mind — that  is,  the  increase  in 
cost  over  original  construction  cost,  which  has  usu- 
ally been  an  increment  made  up  of  many  small 
extensions  and  betterments  constructed  without  ad- 
ditions to  capital. 

Contingencies  of  Construction 

This  subject  has  been  discussed  in  a  general  way 
in  connection  with  the  subject  of  estimates  in  the 
preceding  chapter.  Some  illustrations  from  actual 
experience  will  serve  to  show  why  actual  costs  have 
often  largely  exceeded  preliminary  estimates,  even 

*Some  of  this  is  probably  due  to  reconstruction. 


80  VALUATION  AND  RATES 

when  normal  percentages  have  been  added  thereto 
for  contingencies. 

In  excavating  the  approach  to  a  1200-foot  tunnel 
in  the  Cumberland  Mountains  of  eastern  Kentucky, 
the  work  of  a  large  construction  force  extending 
over  a  period  of  six  months  was  entirely  lost  on  ac- 
count of  a  slide  from  the  mountain  entirely  filling 
the  excavation  as  though  it  had  never  been  made. 
A  thin  strata  of  soapstone,  located  just  below  the 
grade  of  the  finished  excavation,  caused  the  slide 
of  the  material  when  a  surface  ditch,  built  high  on 
the  hillside  to  intercept  the  surface  water,  had  fur- 
nished the  means  for  lubricating  the  soapstone 
strata.  Drilling  down  to  grade  along  the  center 
line  of  this  tunnel  approach  would  not  have  disclosed 
the  presence  of  this  sub-strata. 

The  loss  occasioned  by  this  slide  was  not  limited 
to  the  work  performed  in  excavating  the  material 
alone.  In  order  to  prevent  further  sliding  the  whole 
approach  was  timbered  from  end  to  end  with  the 
heaviest  of  timber  bents  and  lagging.  Further,  the 
closing  of  the  approach  delayed  the  work  on  the 
tunnel,  which  latter  delay  lengthened  the  time  for 
getting  the  entire  line  into  operation. 

The  line  of  the  Greenbrier  extension  of  the  Ches- 
apeake &  Ohio  Railroad  in  West  Virginia  follows 
the  steep  slopes  of  the  Greenbrier  River  for  a  dis- 
tance of  100  miles.  These  slopes  were  apparently 
composed  of  loose  rock  and  large  boulders,  which 
had  fallen  from  the  rock  bluffs,  standing  close  to 
the  edge  of  the  river.  The  excavations  were  what 
is  generally  termed  "side  hill  work" — that  is,  the 
cross-section  of  the  railroad  was  partly  in  excava- 
tion and  partly  in  embankment. 

After  these  excavations  were  completed  material 
from  these  steep  slopes  moved  down  onto  the  road 
bed,  on  account  of  a  clay  substratum,  and  continued 


CONSTRUCTION-RECONSTRUCTION        81 

to  do  so  for  some  years  after  the  road  was  placed  in 
operation.  The  amount  of  material  contained  in 
these  slides  was  a  very  large  percentage  of  the  total 
excavation  along  the  line.  While  apparently  rea- 
sonable allowances  had  been  made  in  the  construc- 
tion estimates,  based  on  similar  construction  in  the 
same  territory,  the  estimates  were  inadequate  to 
cover  this  unforeseen  circumstance. 

There  are  certain  contingencies  which  assume  the 
dimensions  of  a  catastrophe,  such  as  the  destruc- 
tion of  the  road  bed  of  an  entire  division  of  the  San 
Pedro,  Los  Angeles  &  Salt  Lake  in  the  Rocky  Moun- 
tains, immediately  following  its  construction.  While 
this,  as  a  matter  of  fact,  occurred  immediately  after 
the  road  had  been  placed  in  operation,  it  might  as 
well  have  occurred  during  construction. 

The  engineers  in  constructing  the  line  had  laid 
their  grade  line  with  such  data  relating  to  previ- 
ous high  water  as  were  available.  The  flood  which 
caused  the  destruction  was  evidently  unprecedented. 

Another  class  of  contingencies  is  that  of  acci- 
dents caused  through  carelessness  or  disobedience 
of  instructions.  The  falling  into  the  river  of  the 
immense  channel  span  of  the  St.  Lawrence  River 
bridge  in  Canada,  is  an  extreme  example  of  this,  as 
the  loss  was  the  greatest  ever  occasioned  by  a  bridge 
accident.  The  falling  into  the  river  of  the  channel 
span  of  the  Louisville  &  Jeffersonville  Bridge, 
caused  by  faulty  construction  in  the  false  work,  was 
another  example  of  this  class  of  contingencies. 

Unexpected  increases  in  price  of  labor  are  not 
peculiar  to  railroad  construction,  but  serve  to  vitiate 
many  construction  estimates. 

What  has  just  been  said  in  regard  to  contingen- 
cies of  construction  is  not  lessened  in  force  by  the 
fact  that  the  contractor  for  the  work  assumes  a 
large  share  in  certain  classes  of  these  contingencies, 


82  VALUATION  AND  RATES 

as  experience  shows  that  if  they  become  great,  the 
contractor  fails  and  the  company  bears  the  burden 
in  the  end. 

Construction  Organization 

There  are  three  general  methods  followed  in  con- 
structing new  railroads: 

(1.)  New  railroad  companies — those  not  oper- 
ating existing  railroads — have  very  generally  let  a 
contract  to  a  Construction  Company  to  build  the 
line  at  a  certain  stipulated  price  per  mile.  Pay- 
ment for  the  work  is  usually  made  in  stocks  and 
bonds  of  the  railroad  company,  and  such  payment 
is  made  as  certain  specified  sections,  say  20,  50  or 
100  miles  of  line  are  completed,  ready  for  operation. 

(2.)  Another  method  is  that  of  the  railroad,  in 
its  corporate  capacity,  letting  a  contract  direct  to 
one  or  more  firms  of  general  railroad  contractors. 

The  contracts  are  usually  let  after  competitive 
bidding.  The  quantities  of  material  shown  on  the 
engineer's  profile  and  in  his  estimates  are  the  basis 
of  these  bids.  The  contract  usually  provides  unit 
prices  for  the  various  classes  of  work  to  be  per- 
formed, such  as  18c  per  cubic  yard  of  earth  exca- 
vation, 4c  per  pound  for  steel  bridges  erected. 

(3.)  The  third  method  contemplates  the  con- 
struction of  the  work  in  greater  part  by  the  railroad 
company's  own  forces.  This  latter  method  is  usu- 
ally confined  to  branch  lines,  short  extensions,  or 
isolated  sections  of  work. 

The  work  required  in  railroad  construction  is  of 
a  varied  character,  consisting  of  earth,  rock  and 
tunnel  excavation,  the  construction  of  culvert  and 
bridge  masonry  and  the  erection  of  steel  bridges; 
the  framing  and  erecting  of  timber  bridges,  frame 
buildings  and  many  other  things  and  structures. 
These  require  different  kinds  of  construction  plants 
and  labor,  skilled  and  unskilled. 


CONSTRUCTION-RECONSTRUCTION        83 

No  one  organization,  even  among  the  largest  rail- 
road contracting  companies,  possesses  sufficient 
plant  to  construct  a  railroad  of  any  considerable 
length  within  a  reasonable  time.  From  this  arises 
the  necessity  for  letting  portions  of  the  general  con- 
tract to  sub-contractors.  In  the  main,  these  sub- 
contractors will  be  assigned  to  the  particular  work 
next  stated. 

It  may  be  divided  into  several  general  classes  of 
work;  the  sub-contractor  will  be  qualified  to  handle 
one,  or  several  of  these  classes : 

(a)  In  marshy  ground,  where  it  is  necessary  to 
borrow  material  for  embankments  from  the  side, 
the  work  is  usually  performed  with  wheelbarrows, 
or  by  casting  directly  from  the  borrow  pit  into  the 
bank,  the  ground  itself  being  too  soft  to  support  the 
weight  of  teams. 

(b)  In  dry  ground  where  the  heights  of  the  em- 
bankments are  not  too  great  and  in  excavating  cuts 
of  moderate  depth  and  hauling  them  into  embank- 
ments,   "scrapers"    operated    with   teams    are    em- 
ployed. 

(c)  Where  the  haul  on  the  material  from  the 
excavation  to  the  embankment  is  longer  than  may 
be  economically  done  with  scrapers,  "graders"  are 
employed  to  load  wagons,  which  the  long  haul  ne- 
cessitate. 

(d)  The   rock   excavations,    when   they   are   of 
considerable  depth,  require  power  drills,  small  dump 
cars  and  track,  together  with  derricks  and  other 
rock-handling  appliances. 

(e)  The  deeper  cuts,  which  usually  entail  longer 
hauls  on  the  excavated  material,  are  generally  exca- 
vated by  steam  shovel  plants,  which  include  small 
contractors'  engines,  cars  and  track. 

(f)  Tunnel    construction    requires    compressor 


84  VALUATION  AND  RATES 

plants  and  power  drills  together  with  track,  and 
cars  for  transporting  the  material  excavated. 

(g)  The  work  of  building  small  culverts  and  of 
laying  drain  pipes,  which  do  not  require  derricks 
and  other  plants,  will  be  performed  by  small  forces 
of  men. 

(h)  The  driving  and  construction  of  pile  and 
frame  trestles,  requiring  the  use  of  pile  drivers  and 
the  work  of  bridge  carpenters,  will  usually  be  done 
by  other  contractors  than  those  engaged  on  the 
larger  and  more  important  bridges. 

(i)  The  work  of  constructing  the  foundations  and 
masonry  of  bridge  piers  and  abutments  of  the  more 
important  bridges  will  be  assigned  to  contractors 
having  such  equipment  as  derricks,  pile  drivers,  tugs 
and  barges. 

(j)  The  work  of  erecting  the  steel  bridging 
upon  these  piers  and  abutments,  and  the  erection 
and  construction  of  the  necessary  false  work  be- 
tween them  requires  the  use  of  derricks,  travelers 
and  other  special  equipment,  and  this  work  will 
usually  be  assigned  to  firms  engaged  exclusively 
in  it. 

The  general  contractor,  or  the  construction  com- 
pany, will  generally  do  some  portion  of  the  work 
with  his  or  its  own  forces,  particularly  the  danger- 
ous or  most  difficult  portions  of  it.  It  (or  he)  will 
usually  construct  such  things  as  track,  fences,  road- 
crossings,  buildings  and  other  minor  structures. 

The  railroad  company  retains  an  amount — usually 
15% — due  on  current  monthly  payments  as  a  guar- 
antee of  the  completion  of  the  work  under  the  con- 
tract. The  sub-contractors  above  referred  to  are 
usually  men  or  firms  of  comparatively  small  financial 
resources,  who  must  be  assisted  financially  in  start- 
ing their  work  and  often  in  completing  their  con- 
tracts. The  general  contractor  for  the  railroad  com- 


CONSTRUCTION-RECONSTRUCTION        85 

pany,  or  the  construction  company  to  whom  it  dele- 
gates the  power  to  construct  its  railroad,  assumes 
this  burden  of  financing  the  sub-contractor  and  man- 
aging the  actual  work  of  construction. 

The  construction  work  will  be  let  to  these  sub- 
contractors, whether  the  railroad  company  lets  a 
contract  to  a  general  contractor  or  to  a  construction 
company.  In  view  of  this,  it  is  difficult  to  under- 
stand why  the  method  of  doing  the  work  through  a 
construction  company  is  so  severely  criticised  by 
some  present  day  writers.  In  principle,  there  is  no 
difference  which  course  the  company  pursues,  and 
as  to  abuses,  they  may  as  well  occur  under  the  one 
as  under  the  other  plan. 

That  there  have  been  abuses  of  the  method  of 
employing  a  construction  company  to  exercise  the 
duties  of  a  general  contractor  is  not  disputed;  in 
some  cases  the  abuse  has  been  so  flagrant  as  to  con- 
stitute absolute  fraud,  and  the  same  may  be  said  of 
the  alternative  plan.  What  it  is  meant  to  empha- 
size here  is,  that  the  employment  of  a  construction 
company  in  the  construction  of  a  new  railroad  is 
not  evidence  of  fraud  or  bad  faith  on  the  part  of 
the  railroad  company,  or  the  promoters  of  a  railroad 
enterprise.  This  impression  might  readily  be  gained 
by  reading  many  publications  discussing  this 
subject. 

Financial  Difficulties  in  Early  Operation 

The  ten-year  period  immediately  following  the 
construction  of  a  road,  particularly  in  an  unde- 
veloped territory,  is  a  trying  one  from  the  stand- 
point of  the  operating  department  and  the  financial 
management. 

The  operating  expense  is  very  much  above  the 
normal  expense  of  older  roads,  on  account  of  the 
settlement  of  the  new  embankments  and  the  sliding 


86  VALUATION  AND  RATES 

in  of  the  slopes  of  the  new  excavations.  The  settle- 
ment of  embankments  and  the  closing  of  ditches  in 
the  cuts,  make  "soft"  track,  which  in  turn  increases 
the  cost  of  conducting  transportation,  through  the 
slow  schedules  and  delays  occasioned  by  the  condi- 
tion of  the  track. 

The  lack  of  accurate  data  in  regard  to  the  area 
of  waterways  required  at  bridges  and  culverts  will 
have  been  responsible,  in  a  few  instances,  for  their 
construction  with  less  area  than  the  conditions  re- 
quire. In  consequence  there  will  be  "washouts" 
along  the  line,  necessitating  unusual  maintenance- 
of-way  expenditure  and  increased  cost  for  maintain- 
ing the  train  service. 

It  is  during  this  period  that  the  revenues  of  the 
company  are  the  minimum.  While  the  country  may 
be  developing  rapidly  on  account  of  the  new  trans- 
portation facilities,  a  sufficient  period  of  time  has 
not  elapsed  to  create  even  a  moderate  traffic  for  the 
railroad.  In  addition,  there  is  practically  no 
"through"  business,  the  traffic  being  confined  to  the 
local  business  of  the  line. 

At  the  end  of  the  first  eight  or  ten-year  period 
the  larger  part  of  the  ties  will  need  renewing,  as 
that  is  about  the  average  life  of  a  tie.  On  account 
of  the  settlement  of  the  embankments  and  of  the 
"soft"  cuts,  the  rail  will  have  become  badly  "surface 
kinked,"  and  be  unfit  for  passenger  train  service 
and  expensive  to  maintain  for  any  service  what- 
ever. The  temporary  wooden  bridges  and  trestles 
will  require  an  abnormal  amount  of  replacement 
work. 

The  combination  of  operating  revenues  at  a  min- 
imum, of  operating  expenses  at  a  maximum,  and 
of  poor  credit  in  consequence,  has  very  often  caused 
the  financial  collapse  of  the  railroad  at  this  time, 
even  though  the  enterprise  may  have  been  well  con- 


CONSTRUCTION-RECONSTRUCTION        87 

ceived  (as  to  eventual  earning  capacity)  and  skill- 
fully managed  during  the  period  of  development. 

The  difficulties  of  new  railroads  here  related  are 
not  abnormal  ones;  they  are  the  usual  and  normal 
conditions  surrounding  a  railroad  newly  constructed. 
Even  in  those  few  instances  where  the  traffic  seems 
ready  in  advance  of  actual  construction,  it  requires 
time  to  adjust  traffic  to  a  new  line  of  transportation. 

For  these  reasons,  many  of  the  original  railroads 
have  been  foreclosed  by  the  bondholders  and  the 
property  bought  in  by  other  railroads  or  new  cor- 
porations, at  a  price  very  much  below  what  it  had 
cost  to  construct  them.  The  prices  paid  for  these 
railroads  bore  no  relation  whatever  to  cost  or  the 
value  of  the  physical  property.  In  all  instances  they 
were  based  on  what  the  purchaser  supposed  their 
earning  capacity  to  be  when  operated  as  transpor- 
tation facilities.  All  of  our  present  systems  of  rail- 
roads are  made  up,  in  large  part,  of  original  short 
lines  acquired  in  this  way. 

Prior  to  1870  the  maximum  length  of  a  line  for 
efficient  operation  was  generally  100  miles.  The 
Pennsylvania  Railroad  in  the  50's  had  500  miles; 
the  New  York  Central  between  New  York  and  Buf- 
falo, formed  by  consolidating  some  fourteen  com- 
panies, was,  in  1858,  about  500  miles  long;  the 
Chicago  &  North  Western  had  over  500  miles  in 
1866.  Between  1870  and  1890  the  maximum  sys- 
tem had  grown  to  approximately  5,000  miles.  Be- 
tween 1890  and  1900  single  systems  aggregating 
10,000  miles  of  line  were  organized. 

The  following  table,  from  Ripley's  "Railroads — 
Finance  and  Organization,"  shows  the  number  of 
roads  over  1,000  miles  in  length  at  various  periods: 


88  VALUATION  AND  RATES 


1867  

Number. 
1 

Per  Cent  of 
U.  S.  Mileage 
7 

1877  

11 

20 

1887  

28 

44 

1896  

44 

57 

1900  

48 

60 

1910., 

54 

67 

Effect   of   Combination   of   Railroads   on 
Density   of    Traffic 

The  effect  of  combination  of  railroads  on  the 
density  of  traffic  is  very  marked.  The  following  sim- 
ple illustration  will  serve  to  show  the  reason  for 
this: 

In  the  figure,  let  the  horizontal  line  B  represent 
a  railroad  100  miles  long,  not  connected  with  any 
other  railroad,  having  stations  at  five-mile  intervals, 
or  21  stations  in  all.  If  each  station  on  this  line  in- 
terchanges traffic  with  each  of  the  other  stations, 
there  will  be  a  total  of  210  station  interchanges  of 
traffic. 

Let  the  line  A  represent  a  similar  railroad  as  that 
described  for  B.  If  railroad  A  and  B  were  con- 
nected up,  the  total  station  interchanges  would  be 
much  larger  than  the  sum  of  A  and  B  interchanges 
when  operated  alone.  The  interchange  when  con- 
nected up  would  be : 

Interchanges  between  points  on  B.  ...  210 

Interchanges  between  points  on  A ....  210 
Interchanges  between  points  on  A 

and  points  on  B  (21X21) 441 

861 

That  is,  by  doubling  the  mileage,  in  combining  the 
two  single  100  miles  of  line  into  one  line  of  200 


CONSTRUCTION-KECONSTRUCTION        89 

miles,  we  have  increased  the  number  of  station  in- 
terchanges to  such  an  extent  that  they  are  more  than 
four  times  that  of  the  100-mile  line. 

Station  Interchange 

Line  B  Alone 

100  Miles 


Station  Interchange 

Line  A,  B  &  C 

300  Miles 


I    I 


90  VALUATION  AND  RATES 

If  still  another  100-mile  line  C  is  added  to  these 
two,  making  a  single  line  of  300  miles,  the  station 
interchanges  will  be: 

Between  Line  A  and  B  as  above 861 

Between  Line  A  and  C 861 

Between  Line  B  and  C 861 

2583 

The  300-mile  line  is  only  three  times  as  long  as 
the  original  100  mile  line,  but  the  number  of  station 
interchanges  is  more  than  twelve  times  as  large. 

If  the  amount  of  traffic  were  directly  proportional 
to  the  number  of  possible  station  interchanges,  the 
figure  showing  "Station  Interchange"  would  illus- 
trate graphically  the  increased  traffic  density  due  to 
the  combination  of  the  three  100-mile  lines  into  one 
300-mile  system. 

While  traffic  density  does  not  increase  directly 
with  the  possible  station  interchanges,  it  does  in- 
crease in  relation  to  it.  This  is  the  true  explanation 
of  the  cause  of  increased  density  on  main  lines, 
which  is  due  to  the  constantly  increasing  areas 
served  by  the  railroad,  through  extension  into  new 
territory  and  combination  of  existing  railroads. 

Effect  of  Traffic  Density  on  Operating  Expense 

The  combination  of  many  theretofore  independ- 
ent short  lines  into  small  systems  concentrated  the 
traffic  on  certain  lines,  which  required  a  large  in- 
crease in  the  number  of  trains  required  to  handle  it. 
This  had  a  most  important  effect  on  the  operation  of 
such  lines. 

It  will  be  remembered  that  when  first  constructed 
every  possible  expedient  was  used  to  reduce  the  first 
cost  of  construction  to  a  minimum,  which  meant  in- 
creasing distance,  using  large  amounts  of  curva- 


CONSTRUCTION-RECONSTRUCTION        91 

ture  and  stiff  grades,  when  these  were  necessary  to 
secure  cheap  construction  work. 

While  the  traffic  of  the  line  remained  light,  the 
increased  distance,  curvature  and  stiff  grades  did 
not  affect  the  operating  expenses  very  seriously. 
With  the  number  of  trains  increased,  however,  these 
physical  factors  affected  operating  conditions  very 
materially,  even  to  the  extent  of  limiting  the  total 
carrying  capacity  of  the  line  (as  compared  with  a 
line  not  having  these  disadvantages) . 

Effect   of    Distance,    Curvature,   and   Grades 
on    Operating    Expense 

In  connection  with  the  location  and  reconstruc- 
tion of  railroads,  engineers  have  determined  the 
effect  that  distance,  curvature,  and  grades  have  on 
operating  expenses. 

For  additional  distances,  measured  in  miles,  on 
the  basis  of  an  operating  cost  of  $1.76  per  train- 
mile — the  average  for  the  United  States  in  1914 — 
the  added  annual  cost  per  mile  for  each  train  round 
trip  is  $642.  If  there  are  30  trains  each  way  per 
day,  the  total  annual  savings  in  operating  expense 
that  may  be  made,  if  the  distance  is  reduced  one 
mile,  is  then  $19,260. 

Each  degree  of  curvature  on  the  railroad  will  in- 
crease the  operating  expense  ninety-five  cents,  an- 
nually, for  each  train  round  trip.  If  there  are  thirty 
trains  each  way  per  day  the  annual  saving  that 
may  be  made  by  eliminating  one  degree  of  curva- 
ture is  $28.50. 

The  grades  of  a  railroad  are  of  two  kinds : 

Ruling  grades  are  those  which  limit  the  tonnage 
or  length  of  train  which  may  be  hauled  by  a  given 
engine.  Minor  grades  are  those  that  do  not  limit 
the  tonnage  or  length  of  train  which  may  be  hauled, 


92  VALUATION  AND  RATES 

but  involve  the  lifting  of  the  tonnage  over  ele- 
vations. 

Ruling  grades  have  greater  effect  on  operating  ex- 
pense than  any  other  one  of  the  physical  factors  in- 
volved. The  receipts  being  a  certain  fixed  sum,  the 
cost  of  handling  the  traffic  will  be  very  nearly  pro- 
portional to  the  number  of  trains  required  to  handle 

it. 

Roads  of  light  traffic  and  branch  roads  do  not 

usually  have  a  sufficient  volume  of  traffic  to  be  seri- 
ously affected  by  ruling  grades.  The  passenger 
traffic  is  not  generally  affected,  the  high  speed  of 
the  service  demanding  high  steaming  capacity  to 
haul  even  light  loads.  The  effect  of  the  ruling 
gradient  is  usually  confined  to  limiting  the  velocity 
of  the  train.  Local  freight  trains  usually  are  sent 
out  with  many  fewer  cars  than  the  engine  can  haul 
and  are  therefore  not  affected  by  ruling  grades. 

The  traffic  in  bulky  freight,  such  as  ore,  coal, 
timber,  and  all  other  car-load  freight  that  is  han- 
dled in  through  trains,  which  are  made  as  heavy  as 
the  grades  will  permit,  is  the  portion  of  the  traffic 
which  is  affected  by  the  ruling  grade. 

The  revenue  derived  from  moving  this  traffic  is 
fixed.  The  cost  of  a  train-mile  is  nearly  constant. 
If  the  grade  is  reduced,  any  given  engine  can  haul 
a  larger  number  of  cars  in  a  single  train  and  the 
gross  amount  of  the  through  freight  tonnage  can  be 
handled  by  fewer  trains. 

A  Mikado  engine  weighing  a  total  of  405,500 
pounds,  having  196,000  pounds  on  its  drivers,  will 
have  a  tractive  power  of  49,000  pounds.  When  mov- 
ing slowly  up  a  0.6%  grade,  the  total  resistance  to 
traction  is  18  pounds  per  ton  of  load  drawn.  Divid- 
ing 49,000  pounds  by  18  pounds,  we  have  2,722  tons 
as  the  gross  train  load  the  engine  can  haul.  De- 
ducting the  total  weight  of  engine  and  tender,  202 
tons,  leaves  2,520  tons  as  the  net  load  the  Mikado 


CONSTRUCTION-RECONSTRUCTION        93 

can  haul  slowly  up  a  0.6%  grade.  In  the  same  man- 
ner the  net  load  which  the  same  engine  can  haul 
up  a  1.0%  grade  will  be  found  to  be  1,683  tons. 

Dividing  the  1,683  net  tons  by  the  2,520  net  tons 
shows  that  it  will  only  require  two-thirds  as  many 
engines  of  equal  tractive  power  to  haul  a  given 
tonnage  up  a  0.6%  grade  as  up  the  1.0%  grade,  or, 
stated  differently,  two  engines  will  haul  on  a  0.6% 
grade  as  large  a  tonnage  as  three  engines  will  haul 
up  a  1.0%  grade.  (1683x3-5049—2520x2-5040) 

To  ascertain  the  saving  that  can  be  effected  by 
operating  two  daily  trains  instead  of  three,  an 
analysis  of  the  operating  cost  is  necessary.  This 
shows  that  the  effect  on  operating  expenses  of  op- 
erating one  additional  train  is  33  J%  of  the  normal 
average  cost. 

The  average  cost  of  a  train-mile  being  $1.76,  and 
the  cost  of  operating  an  additional  train  being  one- 
third  of  the  average  cost,  the  saving  effected  by 
using  one  less  train  is  one-third  of  $1.76  equals  59 
cents.  The  annual  saving  in  operating  expense  for 
operating  one  less  round  trip  train  would  be  per  mile 
of  road: 

59  cents  per  train  mile  x  2  trips  x  365 -$430.70. 

If  the  division  is  100  miles  long,  the  annual  sav- 
ing would  be  $43,070  for  each  train  saved. 

If  the  total  tonnage  was  5,040  tons — the  load  that 
could  be  hauled  by  two  engines  on  the  0.6%  grade — 
then  the  annual  saving  would  be  the  amount  saved 
by  operating  one  less  train.  If  the  total  tonnage  to 
be  moved  were  double  or  10,080  tons — the  capacity 
of  four  engines  on  the  0.6%  grade — then  the  annual 
saving  would  be  the  amount  saved  by  operating  two 
less  trains,  or  $86,140. 

It  must  be  remembered,  to  avoid  confusion,  that 
this  is  the  saving  effected  by  reducing  the  controll- 
ing grade  so  that  the  number  of  trains  required  to 


94  VALUATION  AND  RATES 

move  a  given  tonnage  is  less.  This  is  a  different 
matter  from  the  next  mentioned,  which  concerns 
what  it  costs  to  lift  a  train  over  a  hill. 

The  effect  of  grades  on  operating  expense  is: 
For  controlling  grades  (maximum  grades),  the  in- 
creased cost  of  operation  on  account  of  each  foot 
of  difference  in  elevation  (rise  plus  fall  divided  by 
2)  is  $3.74  annually,  for  each  train  round  trip.  For 
minor  grades  it  is  $2.81  per  foot. 

Increased  Interest  Charge  v.  Decreased 
Operating  Expense 

In  order  to  shorten  the  distance,  eliminate  curva- 
ture, and  reduce  controlling  grades  so  that  heavier 
trains  may  be  moved,  it  is  necessary  to  expend  cer- 
tain sums  of  money  in  re-constructing  the  road. 
Interest  must  be  paid  on  this  money,  and  in  order 
to  know  whether  the  expenditure  is  wise,  the  ad- 
ditional annual  interest  charge  on  the  new  capital 
required  must  be  compared  with  the  amount  of  op- 
erating expense  that  may  be  saved  by  operating 
over  the  improved  road. 

Application  of  Principles 

The  following  illustration  will  serve  to  show  the 
application  of  these  principles  to  the  solution  of  a 
definite  proposition. 

One  of  the  larger  railroad  systems  had  recon- 
structed its  line  from  Chicago  to  the  southern  Illi- 
nois coal  fields  on  a  basis  of  0.3%  grade  north  and 
0.5%  grade  south  bound.  A  section  of  the  line  70 
miles  in  length,  from  the  coal  field  south  to  the 
Ohio  River,  had  not  been  reconstructed  and  from 
the  nature  of  its  curvature  and  ruling  grades  its 
cost  of  operation  was  high.  The  line  had  9  degree 
curves,  with  a  total  of  2,954  degrees  of  curvature 
and  ruling  grades  in  both  directions  of  1.3%. 


CONSTRUCTION-RECONSTRUCTION        95 

The  operation  consisted  of  three  daily  passenger 
trains  each  way  per  day,  one  local  freight  and  two 
through  freight  trains.  A  proposed  new  connection 
on  the  70-mile  section  promised  a  large  increase  of 
through  northbound  tonnage,  consisting  principally 
of  such  commodities  as  pig  iron,  lumber  and  phos- 
phate rock.  This  additional,  with  the  existing  ton- 
nage, required  the  movement  of  9,000  tons  per  day 
of  through  north  bound  traffic. 

A  survey  of  the  70-mile  section  developed  the 
fact  that  the  ruling  grades  could  be  reduced  to  the 
standards  established  north  of  the  coal  fields,  by 
using  one  pusher  grade  8  miles  long  at  one  summit, 
for  a  total  cost  of  $2,300,000.  These  definite  con- 
ditions necessitated  the  solving  of  the  problem  of 
whether  the  fixed  annual  charge  for  interest  on  the 
cost  of  improving  the  line  would  be  greater  or  less 
than  the  saving  in  operating  expense  which  the  im- 
provement would  effect. 

As  the  northbound  tonnage  exceeded  the  south- 
bound, the  northbound  grade  was  the  ruling  grade. 
The  northbound  grade  was  0.3%.  The  new  line  re- 
duced the  distance  1.6  miles;  the  curvature  2,074 
degrees  and  the  rise  and  fall  in  the  grade  line  280 
feet. 

The  total  through  freight  to  be  hauled  was  9,000 
tons.  The  Mikado  locomotive  heretofore  mentioned, 
with  a  total  weight  of  405,500  pounds,  has  a  tract- 
ive power  of  49,000  pounds.  The  total  train  re- 
sistance on  a  1.3%  grade  is  32  pounds  per  ton  of 
train.  Dividing  49,000  by  32  gives  1,531  tons  as  the 
gross  load  the  engine  can  haul.  Subtracting  the 
total  weight  of  the  engine,  203  tons,  leaves  1,328 
tons  as  the  net  load  of  cars  and  lading.  Assuming 
the  weight  of  the  empty  cars  as  one-third  of  the 
total  weight,  the  tons  of  freight  that  can  be  hauled 

will  be : 

1,328  tons  less^p  =896  tons. 


96  VALUATION  AND  RATES 

Dividing  the  total  through  tonnage  to  be  moved, 
9,000,  by  896  tons  per  train,  gives  10,  which  is  the 
number  of  daily  trains  that  would  be  required  to 
move  the  tonnage  on  a  1.3%  grade. 

Using  the  same  engine  on  a  0.3%  grade,  it  will 
be  found  that  only  4  trains  will  be  required  to  move 
the  9,000  tons.  Two  such  engines  (the  road  and 
the  pusher  engine)  will  move  the  tonnage  up  the 
pusher  grade. 

The  factors  heretofore  given  when  applied  to  the 
number  of  trains  saved  by  reducing  the  ruling  grade ; 
to  the  number  of  degrees  of  curvature  eliminated; 
to  the  distance  shortened;  to  the  reduction  in  the 
rise  and  fall  of  the  grade  line,  will  indicate  the  an- 
nual saving  in  operating  expense  which  the  improve- 
ment in  these  operating  factors  will  effect. 

Summarizing  these  different  annual  savings,  we 
have: 

Reducing  ruling  grade $164,894 

Reducing  curvature 27,584 

Reducing  distance 14,380 

Reducing  rise  and  fall 14,660 


Total  annual  saving  in  op- 
erating expense $221,518 

The  cost  of  the  improvement,  as  before  stated, 
was  $2,300,000,  which  at  5%  interest  would  make 
an  increased  annual  interest  charge  of  $115,000. 
The  annual  profit  to  the  railroad  in  making  the  im- 
provement is  therefore  $221,518,  annual  saving  in 
operating  expense,  less  $115,000  increase  in  fixed 
charge  (interest),  which  is  $106,518. 

When  the  traffic  density  of  a  line  has  increased 
considerably,  such  questions  as  the  one  involved  in 
the  illustration  will  come  up  for  solution.  The  anal- 
ysis of  them  is  always  from  an  economic  standpoint, 
the  possible  saving  in  operating  expense  being  com- 


CONSTRUCTION-RECONSTRUCTION        97 

pared  with  the  increased  interest  charge  on  the  new 
capital  required  to  make  the  improvement  in  the 
operating  physical  factors  of  distance,  curvature, 
and  grade.  Whenever  the  saving  exceeds  by  a  con- 
siderable amount  the  increased  interest  charge,  the 
improvement  will  be  undertaken,  if  money  at  rea- 
sonable rates  of  interest  is  available  for  the  pur- 
pose. 

In  this  connection  it  must  be  noted  that  the  pos- 
sible saving  in  operating  expense,  by  improving  the 
grades  and  other  factors,  increases  directly  with  the 
number  of  trains.  It  follows  that  what  might  be 
a  good  investment  in  improving  the  line  if  ten  daily 
trains  were  run,  would  be  ill  advised  and  unwar- 
ranted from  an  economic  standpoint  if  only  five 
were  run.  It  is  the  increased  traffic  density  which 
makes  the  net  saving  in  cost  of  moving  the  traffic 
possible. 

Reconstruction 

The  conditions  attending  the  reconstruction  of 
railroads  were  very  different  from  those  that  ex- 
isted at  the  time  of  their  original  construction. 
Economy  in  operation  rather  than  available  capital 
was  the  controlling  factor.  It  must  be  remembered, 
however,  that  this  last  sentence  applies  to  roads 
whose  reconstruction  assured  very  large  and  im- 
mediate returns  on  the  cost  of  the  improvement,  as 
for  instance,  the  Lucin  Cut-Off  of  the  Union  Pacific, 
which  effected  an  annual  saving  of  $1,000,000  in 
operating  expense  by  the  expenditure  of  $10,000,000 
for  reconstruction.  There  are  many  railroads  op- 
erating today  which  might  be  reconstructed,  from 
an  economic  standpoint,  if  the  capital  for  the  im- 
provement were  available  at  a  reasonable  rate  of 
interest — say  five  per  cent  per  annum,  with  no  dis- 
count on  the  securities  issued  to  provide  for  the 
improvement. 


98  VALUATION  AND  RATES 

The  financing  of  the  reconstruction  had  the  ben- 
efit of  a  credit  based  on  the  accomplishments  of  a 
going  concern,  whose  past  earnings  were  known. 
Further,  the  minimum  available  traffic  on  which 
to  base  the  calculation  for  possible  operating  econ- 
omies was  definitely  known,  and,  in  consequence,  the 
justifiable  expenditure  for  reconstruction  could  be 
stated  with  reasonable  certainty. 

Changes  in  Character  of  Road,  Structures 
and    Equipment 

This  reconstruction  altered  the  character  of  the 
original  roads  in  many  important  particulars,  both 
as  to  their  roadbed  and  equipment.  The  most  im- 
portant changes  are  stated  in  the  following  para- 
graphs : 

(a)  The  most  important  single  feature  of  the 
reconstruction,  both  as  to  cost  of  the  improvement 
and  of  the  effect  on  operating  expense   was  the 
reduction  of  the  ruling  gradient  of  the  road,  for  the 
purpose  of  increasing  the  tonnage  which  could  be 
hauled  in  one  train. 

(b)  The  increased  length  of  train,  made  possi- 
ble by  reduction  in  the  ruling  gradient,  necessitated 
the  reduction  of  curvature,  both  as  to  amount  and 
to   the   sharpness    of   curves,   on   account   of   their 
effect  on  such  longer  trains. 

(c)  To  reduce  the  gradients  and  curvature,  with 
the   expenditure   of  the   least   possible   amount   of 
money  for  reconstruction,  often  necessitated  an  en- 
tirely new  location  of  the   line   at  certain   points. 
This  required  the  purchase  of  a  new  right  of  way 
at  very  much  higher  unit  prices  than  was  paid  for 
the  original  line,  it  having  served  to  develop  and 
thus  increase  the  value  of  property  in  the  entire 
district  traversed.     An  illustration  of  the  amount 


CONSTRUCTION-RECONSTRUCTION        99 

of  this  increase  is  shown  by  the  two  following  in- 
stances : 

In  the  construction  of  a  line  in  Southern  Illinois 
near  a  county  seat  town,  the  railroad  was  compelled 
to  take  a  parallel  strip  of  land  for  a  distance  of 
about  one-half  a  mile  through  a  growing  orchard; 
the  cost  for  this  additional  land  exceeded  $5,000  per 
acre.**  In  the  reconstruction  of  the  L.  &  N.  R.  R., 
near  Nashville,  Tenn.,  through  property  whose  nor- 
mal value  was  perhaps  $200  to  $300  per  acre,  the 
cost  of  a  parallel  strip  of  land  exceeded  $4,000  per 
acre. 

The  reason  for  this  large  increase  in  unit  price 
per  acre  for  land  required  for  reconstruction  is  prob- 
ably found  in  the  fact  that  some  authorities  hold 
that  a  railroad  company  exhausts  its  right  of  con- 
demnation when  it  acquires  its  original  right  of 
way;  hence  individual  bargaining,  rather  than  con- 
demnation proceedings,  must  be  resorted  to  in  the 
acquirement  of  real  estate  for  reconstruction  pur- 
poses. Whether  this  latter  proposition  is  legally 
sound  or  not,  there  is  no  question  as  to  the  cost  of 
real  estate  for  reconstruction  purposes  being  many 
times  greater  than  the  current  market  price  of  land 
adjoining  it. 

(d)  When  the  reconstruction  of  the  line  does 
not  involve  a  new  location,  it  is  necessary  to  con- 
struct temporary  tracks  to  carry  the  traffic  while 
the  reconstruction  work  is  being  prosecuted.     As 
reconstruction  work  is  confined  to  lines  of  compar- 
atively heavy  traffic,  these  temporary  tracks  must 
of  necessity  be  of  substantial  construction,  and,  in 
consequence,  add  much  to  the  cost  of  reconstructing 
the  line. 

(e)  In  order  to  effect  economies  in  the  main- 
tenance of  the  roadbed,  and  to  prevent  the  loss  of 


**A  mile  of  right  of  way,  of  the  usual  width,  would  cost  $60,000 
on  this  basis  of  land  value. 


100  VALUATION  AND  RATES 

expensive  ballast,  which  the  heavy  traffic  requires, 
the  cross-sectional  areas  of  excavations  and  embank- 
ments is  very  much  increased  over  that  of  the  orig- 
inal construction. 

Reduction  of  the  grade  deepens  excavations,  mak- 
ing them  longer,  which  increases  the  length  of  the 
hauls  on  the  materials  from  the  excavations  into 
the  embankments.  The  longer  hauls,  in  turn,  in- 
crease the  cost  per  yard  of  material  excavated.  That 
is,  both  the  quantity  of  material  and  the  price  per 
unit,  is  very  much  increased  in  reconstruction  work 
over  that  of  the  original  construction. 

(f )  As  the  life  of  untreated  timber  trestles  and 
other  timber  structures  in  the  roadbed  is,  as  an  av- 
erage, only  ten  years,  the  annual  cost  of  maintaining 
such  structures  is  comparatively  high.  The  cost  of 
masonry  is  very  much  less  when  the  transportation 
cost  of  its  constituent  materials  is  reduced.  As  here- 
tofore stated,  the  cost  of  transporting  such  material 
by  wagons  is  about  forty  cents  per  ton-mile,  while 
its  cost  in  railroad  cars  is  less  than  one-half  cent 
per  ton-mile.  It  is  evident  from  this,  that  in  many 
situations,  it  will  be  economical  to  use  masonry 
structures  in  a  reconstructed  line,  while  it  would 
be  the  reverse  of  economical  to  use  them  in  original 
construction. 

For  this  reason,  in  practically  all  reconstruction 
work,  the  temporary  structures  are  replaced  by 
permanent  structures  of  masonry  and  steel  or  rein- 
forced concrete.  This  replacement,  as  shown,  is 
economical  in  itself,  but  it  increases  the  capital  ex- 
penditure to  a  very  large  extent.  Comparisons  be- 
tween the  costs  of  temporary  timber  structures  and 
of  various  permanent  structures  to  replace  them  are 
shown  in  the  following : 

The  average  cost  of  trestles  on  the  Santa  Fe  in 
Illinois  for  1910,  using  untreated  timber,  was  $11.20 


CONSTRUCTION-RECONST^IICTION      10  1 


per  lineal  foot  for  open-deck  ires-ties:  -for 
trestles  with  ballasted  floors,  the  cost  was  $16.20; 
the  cost  of  concrete  trestles  varies  between  $20  and 
$25  per  lineal  foot. 

A  temporary  trestle,  constructed  for  the  purpose 
of  carrying  a  public  highway  under  the  roadbed, 
where  the  height  of  the  embankment  is  20  feet, 
would   cost  something   less  than   $1,400;   the   cost 
of  a  reinforced  concrete  underpass,  to  replace  such 
temporary  timber  structure,   would   be   $5,800,   or 
about  four  times  the  cost  of  the  temporary  struc- 
ture.    The  difference  in  cost  between  timber  and 
masonry  piers  for  girder  span  bridges  is  approxi- 
mately as  $10  is  to  $28,  per  lineal  foot  of  bridge. 

(g)     The  weight,  and  consequently  the  cost,  of 
the  steel  bridges  has  increased  rapidly,  as  the  in- 
crease in  density  of  traffic  requires  heavier  engines. 
The  weight  of  the  steel  structures  is,  of  course,  pro- 
portional* to  the  weight  of  the  equipment,  which 
it  carries.     The   following  statement,  taken  from 
Gillette's  "Cost  Data,"  shows  the  increase  in  weight 
of  locomotives  on  the  B.  &  O.  R.  R.  between  1835 
and  1895: 

Weight  in  Tons. 
1835   .......................   10.7 

1851   .......................  37.3 

1863   .......................   45.4 

1873   .......................   52.6 

1881   ..................  .  ____   54.3 

1886   .......................   56.6 

1890   .......................   66.5 

1894  .......................   80.4 

1895  ...........  ............   95.0 

A  Mikado  engine,  a  not  uncommon  modern  type, 
weighs  approximately  200  tons  —  total  of  engine  and 
tender. 

*Not  directly  proportional. 


102      %          VALUATION  AND  RATES 

The  Xiazna  Viaduct,  a  steel  structure,  constructed 
on  the  Erie  R.  R.  in  1882,  weighed  1,400  tons.  The 
weight  of  the  viaduct  which  replaced  it  in  1910  was 
3,350  tons,  or  more  than  double  the  weight  of  the 
original  structure.  This  is  a  typical,  rather  than  an 
isolated  case  of  increase  in  weights  of  bridges. 

(h)  The  timber  culverts  and  tile  pipes  of  the 
original  construction  are,  in  most  instances,  re- 
placed with  cast  iron  pipe  in  reconstruction.  The 
difference  between  the  cost  of  a  36-inch  vitrified 
tile  pipe  and  of  a  cast  iron  pipe,  under  an  embank- 
ment 20  feet  high,  is  as  $300  is  to  $630. 

(i)  The  frame  depots  of  the  original  construc- 
tion will  generally  be  replaced  with  brick  passen- 
ger stations,  having'  brick  or  concrete  platforms 
and  some  type  of  permanent  construction  for  the 
freight  houses.  The  cost  of  the  original  frame  sta- 
tions was  usually  between  12c  and  15c  per  cubic 
foot ;  the  cost  of  the  permanent  structures  which  re- 
place them,  will  seldom  be  less  than  25c  per  cubic 
foot,  and  sometimes  considerably  higher  than  this. 
The  size  of  the  building  will  usually  be  increased, 
as  well  as  the  unit  price. 

(j)  The  cost  per  mile  of  track,  using  60-lb.*  rail, 
not  including  ballast,  is  $7,500;  the  cost  of  track, 
using  an  85-lb  rail,  without  ballast,  is  $9,650.  A 
great  many  of  the  railroads  were  originally  con- 
structed with  56-lb  and  60-lb  rail,  and  in  some  in- 
stances even  lighter  than  this.  On  any  important 
main  line,  the  rail  is  seldom  less  than  85-lb.  rail,  and 
in  some  instances  exceeds  100-lb. 

The  more  frequent  train  service,  made  necessary 
by  denser  traffic,  necessitates  the  location  of  passing 

*60-lb.  rail  means  that  one  yard,  or  three  feet,  of  the  rail 
weighs  60  Ibs.  The  cost  of  the  rail  is  directly  proportional  to 
this  weight,  although  the  cost  of  track  of  60-lb.  rail  is  not  directly 
proportional  to  one  of  85-lb.  rail,  as  there  are  some  items,  such  as 
ties,  which  are  common  to  both.  In  the  85-lb.  track  cost  of  im- 
proved joints  and  tie  plates  is  included. 


CONSTRUCTION-RECONSTRUCTION      103 

tracks  at  shorter  intervals  than  are  required  for  the 
lighter  traffic  of  the  original  line.  Passing  tracks 
are  very  often  located  at  intervals  of  ten  miles  on 
original  construction,  with  the  idea  of  placing  inter- 
mediate tracks  at  five-mile  intervals  when  increased 
traffic  demands  it.  These  will  usually  be  built  at 
the  time  the  road  is  reconstructed. 

In  many  situations,  particularly  at  points  where 
railroads  cross  each  other,  and  at  the  entrance  into 
busy  freight  yards,  the  crossings  and  switches,  which 
replace  those  first  laid,  are  constructed  of  manga- 
nese steel,  the  cost  of  which  is  usually  four  times 
that  of  the  original  construction. 

The  heavier  traffic  of  the  reconstructed  line  re- 
quires ballast  of  rock,  chats,  or  gravel.  Even  when 
the  road  theretofore  has  been  ballasted,  a  "raise" 
of  four  inches  or  more  of  new  ballast  will  be  re- 
quired. The  cost  per  mile  of  twelve  inches  of  rock 
ballast  will  usually  be  about  $3,900.* 

It  will  be  noted  from  these  items,  that  the  cost 
of  the  track  in  reconstruction  is  very  much  higher 
than  the  track  of  the  original  construction. 

(k)  The  chance  for  accidents  at  railroad  cross- 
ings increases  with  the  increase  in  number  of  trains. 
Road  crossings  which  may  be  operated  in  compar- 
ative safety  when  the  line  carries  only  a  light  traffic, 
become  dangerous  as  the  number  of  trains  increase. 

The  authorities,  both  state  and  municipal,  have 
of  late  years  insisted  on  the  separation  of  the  grade 
of  the  highways  from  that  of  the  railway  at  these 
crossings,  and  this  has  necessitated  an  expenditure 
of  very  large  sums  of  money  on  the  part  of  the  rail- 
roads in  constructing  new  crossings  over  or  under 
the  operated  lines.  The  requirements,  as  to  grade 
and  width  of  the  approaches  to  these  required  cross- 

*On  basis  of  60  cents  for  stone  and  40  cents  for  labor  inserting 
and  surfacing,  making  a  total  cost  of  $1  per  cubic  yard  in  place. 


104  VALUATION  AND  RATES 

ings,  are  much  more  rigid  than  obtained  at  the  time 
of  the  original  construction.  This  involves  a  very 
much  larger  expenditure  in  the  construction  of  con- 
siderable embankments  and,  in  most  cases,  the  ac- 
quirement of  additional  land  upon  which  to  con- 
struct the  new  road  approaches. 

As  an  instance  of  the  amount  of  money  involved 
in  such  changes  of  road  crossings,  the  reconstruc- 
tion of  36  miles  of  line  in  northern  Indiana  required 
the  abolishment  of  54  grade  crossings.  The  esti- 
mated cost  of  separating  the  grade  of  the  crossings 
from  that  of  the  railroad  was  $293,500.  This 
amount,  for  the  36  miles  of  reconstruction,  added 
$8,150  per  mile  to  the  cost  of  the  reconstructed  line. 

*The  cost  of  crossing  a  double  track  railroad 
with  an  overhead  roadway  20  feet  wide  on  the  ap- 
proaches, and  16  feet  wide  on  the  overhead  bridge, 
at  current  prices,  is  approximately  $7,900,  without 
allowance  for  additional  real  estate  or  damage  to 
abutting  property  on  account  of  the  construction. 

(1)  What  has  just  been  said  in  regard  to  the 
crossing  of  public  highways,  applies  as  well  to  the 
crossings  of  other  railroads,  the  cost  of  the  latter, 
however,  being  very  much  greater  than  the  former. 

Usually  the  work  is  not  confined  to  the  line  under 
reconstruction,  but  extends  as  well  to  the  line  of 
the  railroad  which  it  crosses,  for  a  considerable  dis- 
tance on  each  side  of  the  crossing.  When  the  cross- 
ings occur  in  a  district  like  that  at  Grand  Crossing, 
just  south  of  Chicago,  the  cost  is  measured  in  mil- 
lions of  dollars,  and  even  under  the  most  favorable 
conditions  the  cost  is  a  considerable  amount. 

(m)  Most  of  the  reconstructed  lines,  at  least 
those  of  recent  years,  have  adopted  a  system  of 
automatic  signals  to  protect  the  train  service.  The 
cost  of  such  a  system,  using  direct  current,  is  from 


*When  adjoining  land  is  the  same  elevation  as  the  track. 


CONSTRUCTION-RECONSTRUCTION      105 

$1,500  to  $1,800  per  mile;  for  alternating  current, 
$1,800  to  $2,000  per  mile.  Inasmuch  as  the  cost 
of  maintenance  on  the  latter  is  about  one-half  that 
of  the  former,  the  alternating  current  is  being  very 
generally  adopted.  These  figures  are  based  on  a 
system  of  circuits  with  one  mile  blocks. 

(n)  The  cost  of  the  reconstruction  is  very  much 
increased  when  the  traffic  is  such  as  to  require  a 
second  track,  the  amount  of  the  increase  depend- 
ing on  the  character  of  the  country,  in  which  the 
line  is  located.  In  a  very  hilly  or  mountainous  coun- 
try, where  the  line  lies  largely  on  the  slopes  of  steep 
hills,  or  in  rock  bluffs,  the  cost  of  the  second  track 
alone  will,  in  some  instances,  exceed  the  cost  of 
grading  the  original  line. 

(o)  The  capacity  of  the  yards  at  the  terminals 
of  a  line  must,  in  consequence  of  all  the  foregoing, 
be  very  greatly  increased  to  avoid  serious  blockades. 
On  account  of  the  very  large  expenditures  required 
for  obtaining  the  necessary  real  estate  at  important 
terminals,  this  matter  has  in  many  cases  been  de- 
ferred, as  far  as  possible,  and  is  today  one  of  the 
most  serious  operating  problems  of  the  railroad  com- 
panies. 

Even  in  small  places  the  cost  of  increasing  term- 
inal or  yard  facilities  is  necessarily  high,  and  adds 
materially  to  the  cost  per  mile  of  reconstruction. 

(p)  As  the  density  of  the  traffic  increases, 
heavier  engines  are  more  economical  in  operation 
than  the  former  lighter  engines.  The  cost  of  light 
passenger  engines  formerly  had  been  from  $6,000 
to  $10,000  for  the  American  type.  The  heavier  en- 
gines of  the  Atlantic  and  Pacific  type  now  cost 
from  $17,000  to  $18,500;  the  Mogul  engines  here- 
tofore in  use,  costing  $8,000,  have  been  in  many  in- 
stances replaced  by  Consolidation  and  Mikado  en- 
gines costing  $19,000.  It  is  evident  from  this  that 


106  VALUATION  AND  RATES 

there  has  been  a  very  large  increase  in  the  expend- 
iture for  motive  power,  caused  by  the  increased 
density  of  traffic. 

The  use  of  the  larger  engines  has  required  the 
reconstruction  of  the  engine  houses,  and  in  such 
reconstruction  permanent  structures  have  replaced 
the  temporary  ones  of  the  first  line.  A  modern  en- 
gine house,  as  now  constructed,  costs  $3,500  per 
stall;  the  older  engine  houses,  of  temporary  con- 
struction, cost  about  $1,500  per  stall. 

The  turn  tables,  at  division  and  terminal  points, 
have  been  replaced  on  account  of  this  increase  in 
size  of  engines.  A  70-foot  turn  table  costs  prac- 
tically $7,000;  a  modern  90-foot  turn  table  costs 
$13,100. 

(q)  Freight  cars  have  also  been  improved,  as 
a  result  of  increased  business  and  of  more  econom- 
ical design.  The  ratio  of  the  weight  of  a  freight 
car  to  its  carrying  capacity  has  a  very  important 
effect  on  operating  economy. 

In  1885  the  standard  box  cars  weighed  24,800  Ibs. 
and  had  a  carrying  capacity  of  50,000  Ibs.,  or  two 
times  the  weight  of  the  car.  At  this  time  60,000, 
80,000  and  100,000  Ibs.  capacity  cars  are  standards 
for  various  classes  of  service.  The  weight  of  a 
100,000  Ib.  capacity  car  is  38,500  Ibs.,  and  its  car- 
rying capacity  therefore  2.6  times  its  weight. 

To  handle  such  cars  in  long  trains  safely,  requires 
the  use  of  improved  couplers  and  air  brakes.  In 
1889  less  than  12%  of  the  cars  and  locomotives  in 
use  were  equipped  with  air  brakes;  at  the  present 
time  practically  all  of  them  are  so  equipped.  In 
1889  less  than  8  per  cent  of  the  cars  were  equipped 
with  automatic  couplers;  practically  all  cars  are 
now  so  equipped. 

While  the  use  of  cars  of  high  carrying  capacity 
is  economical,  the  increased  cost  of  such  equipment 


CONSTRUCTION-RECONSTRUCTION      107 

has  added  very  materially  to  the  capitalization  of 
the  railroads. 

Estimates  of  Cost  of  Reconstruction 

The  following  estimated  costs  per  mile*  for  re- 
constructed roads  may  be  of  interest  in  this  con- 
nection : 

In  reducing  the  controlling  grade  on  61  miles  of 
railroad  from  1.3%  to  0.3-0.5%  the  costs  were  as 
follows : 

Per  mile. 

Grading $22,178 

Bridging 3,502 

Track 7,801 

Minor  Structures 1,018 

Real  Estate,  Engineering, 

General  Expenditure 3,368 


$37,867 

It  must  be  understood  that  not  all  of  the  61  miles 
of  line  was  affected  by  the  reconstruction.  On  cer- 
tain portions  the  original  grades  were  well  below 
the  proposed  controlling  grade,  the  work  being  con- 
fined to  those  points  where  the  original  grade  ex- 
ceeded the  proposed  controlling  grade,  or  excessive 
curvature  required  elimination. 

The  reconstruction  cost  of  34  miles  of  line  in  the 
flat  country  of  northern  Indiana,  the  controlling 
grade  being  reduced  from  0.5%  to  0.2%,  was 
$47,000  per  mile  of  line. 

Increased   Capitalization   Due  to   Reconstruction 

It  is  evident  that  a  very  substantial  increase  in 
the  capitalization  of  the  railroads  has  been  neces- 


*None  of  these  estimates  include  cost  of  equipment  or  bankers' 
commissions  and  discounts. 


108  VALUATION  AND  RATES 

sary  to  cover  the  cost  of  the  reconstruction  of  the 
road  bed  and  the  improvement  of  the  equipment. 
This  analysis  by  items  explains  the  increase  in  the 
average  capitalization  per  mile  of  railroads  in  the 
United  States  since  original  construction. 

Prior  to  1906  the  capital  actually  employed  in 
transportation  was  not  separated  from  "securities 
owned"  in  statements  of  railroad  capitalization. 
Since  that  time  the  Interstate  Commerce  Commission 
has  required  this  division  of  capital  account.  For 
this  reason  figures  for  comparative  purposes  are  not 
available  for  years  prior  to  1906.  The  following 
table  shows  the  net  capitalization  of  active  railroads 
in  the  United  States,  per  mile  of  line : 

1906 $52,050 

1907 58,200 

1908 57,200 

1909 59,200 

1910 62,600 

1911 63,900 

1912 63,500 

1913 65,900 

1914 66,661 

This  table  reflects  the  effect  on  capitalization  of 
this  reconstruction  period.  It  must  be  remembered 
that  this  increase  is  due  to  this  reconstruction  and 
not  to  arbitrary  increases  in  capital,  as  many  writers 
and  critics  of  the  railroads  have  assumed. 

The  work  of  comprehensive  reconstruction  has 
applied  only  to  important  main  lines  and  lines  hav- 
ing a  very  large  tonnage.  Had  all  of  the  lines  been 
reconstructed  in  the  manner  heretofore  described 
the  capitalization  would  have  been  much  more  than 
doubled. 


CONSTRUCTION-RECONSTRUCTION      109 

Constant  Reconstruction 

Railroads  are  in  constant  course  of  rebuilding, 
improving  and  extending  their  facilities.  In  this 
connection,  the  testimony  of  Mr.  E.  P.  Ripley,  Pres- 
ident of  the  A.  T.  &  S.  F.,  in  the  hearing  of  the 
Interstate  Commerce  Commission,  in  1910,  relating 
to  rates  between  Chicago  and  the  Rocky  Mountains, 
is  interesting. 

In  answer  to  the  question  of  the  Examiner  of  the 
Commission  as  to  whether  the  western  roads  "had 
been  built  round  about  50  years,"  he  replied : 

"Yes  sir.  Some  of  them  longer,  but  they  have 
been  in  constant  course  of  rebuilding  ever  since 
they  were  constructed.  The  railroad  of  50  years 
ago  would  not  carry  anything  now  and  the  rail- 
road of  50  years  ago  would  not  be  considered  even 
equal  to  a  contractor's  plant  for  building  a  railroad. 
They  have  been  in  constant  course  of  rebuilding 
ever  since,  and  that  has  been  going  on  indefinitely." 

He  further  stated  that  within  his  recollection  the 
A.  T.  &  S.  F.  has  been  rebuilt  three  times. 

The  President  of  the  Baltimore  &  Ohio  R.  R., 
Mr.  Daniel  Willard,  made  a  statement,  at  a  meet- 
ing of  the  members  of  the  headquarters  staff  of  that 
system,  that  during  the  five-year  period,  1910-1915, 
$100,000,000  had  been  expended  on  the  system  for 
betterments,  and  that  about  $50,000,000  of  the 
amount  had  been  expended  for  additional  tracks, 
terminals  and  grade  reductions. 

The  same  thing  is  true  of  every  one  of  the  large 
systems.  Combinations  of  smaller  roads  into  sys- 
tems have  concentrated  traffic  along  certain  lines 
and  general  routes,  requiring  their  reconstruction. 
These  first  smaller  systems  have  been  combined  into 
larger  systems,  and  still  greater  concentration  of 
traffic  has  required  further  reconstruction,  the  con- 
struction of  second  tracks  (in  several  instances  of 


110  VALUATION  AND  RATES 

six  tracks),  and  an  enormous  expanding  of  yards, 
terminals  and  other  facilities. 

The  modern  railroad  is  as  far  superior  to  the 
railroad  of  40  or  50  years  ago  as  the  first  railroads 
were  to  the  old  turnpikes.  This  fact  must  be  con- 
stanly  kept  in  mind  in  considering  the  subject  of 
railroad  capitalization,  physical  value  and  the  re- 
lated subject  of  railroad  rates. 

Summary  of  Construction  and 
Reconstruction  Periods 

The  following  is  a  fair  summary  of  conditions 
and  the  important  facts  relating  to  the  Construction 
and  Reconstruction  of  the  railroads: 

(1)  The  availability  of  capital  has  been  the  con- 
trolling factor  in  determining  the  character  of  the 
construction  of  new  lines.    In  the  original  construc- 
tion many  temporary  structures  were  built  to  reduce 
the  original  expenditure.     The  various  expedients 
for  reducing  capital  cost  were  justified  by  the  dif- 
ficulty encountered  in  securing  capital,  and  the  cer- 
tainty of  the  volume  of  traffic  being  small  for  a  con- 
siderable period  next  following  construction. 

These  conditions  as  to  capital  have  applied  not 
only  to  small  roads,  and  to  the  earliest  periods  of 
construction,  but  to  large  systems  and  to  compara- 
tively recent  times,  as  exemplified  in  the  experience 
of  the  Gould  System  in  its  extensions  into  the  Pitts- 
burgh District  and  to  the  Pacific  Coast. 

(2)  In  addition  to  the  current  maintenance  of 
roadway  and  structures,  the  forces  of  the  railroad 
companies,    and   its   contractors,   have    constructed 
extensions  of  facilities  and  betterments  out  of  earn- 
ings, without  increase  of  capitalization.    Actual  val- 
uations of  large  systems  have  shown  that  these  un- 
capitalized  additions  form  a  very  considerable  per- 
centage of  the  original  cost  of  construction. 


CONSTRUCTION-RECONSTRUCTION      111 

(3)  Contingencies  are  incident  to  construction. 
Many  of  them  in  actual  work  have  been  so  great 
as  to  constitute  catastrophes,  causing  the  loss  of  all 
capital  invested.     In  all   construction,   large   addi- 
tions to  estimates  must  be  made  to  provide  for  them, 
but  the   records   of  most   construction   work   have 
shown,  that  even  when  seemingly  sufficient  addi- 
tions have  been  made — based  on  previous  experi- 
ence in  similar  work — they  are  generally  insufficient 
to  cover  the  actual  conditions. 

(4)  The  construction  of  a  railroad  involves  many 
different  classes  of  work  and  a  very  large  plant, 
composed  of  many  varying  kind  of  tools  and  ma- 
chinery.    It  is  not  expedient  for  a  railroad  or  for 
any  firm  of  contractors,  however  large,  to  own  a 
plant  of  sufficient  size  to  build  a  railroad  unaided. 

The  necessities  of  construction  require  the  let- 
ting of  the  contract  by  a  railroad  to  a  contractor  or 
a  construction  company,  and  the  subletting  by  them 
of  much  work  to  smaller  subcontractors. 

While  in  isolated  cases  abuses  have  grown  out  of 
the  latter  method  of  constructing  railroads,  such 
instances  do  not  serve  to  show  any  inherent  fault 
in  the  method  of  constructing  new  railroads  through 
a  construction  company.  Either  that,  or  some  equiv- 
alent expedient,  is  absolutely  essential.  In  conse- 
quence, the  general  condemnation  of  the  practice 
of  constructing  work  through  construction  com- 
panies is  unwarranted,  as  the  same  abuses  may  and 
do  occur  when  the  work  is  performed  by  a  con- 
tractor, or  by  the  company  with  its  own  forces. 

(5)  Even  in  the  case  of  well-conceived  railroad 
enterprises,  honestly  built  and  skillfully  managed, 
the  combination  of  abnormally  high  operating  ex- 
penses, low  operating  revenue,  and  the  necessity  for 
large  renewals  of  ties,  rails,  and  temporary  bridge 
and  other  structures  at  the  end  of  the  first  ten-year 


112  VALUATION  AND  RATES 

period,  has  caused  the  financial  collapse  of  many 
such  enterprises.  In  foreclosure  sales  of  these  prop- 
erties, neither  the  cost  nor  the  physical  value  of  the 
property  has  determined  the  price  for  which  they 
have  been  sold,  their  earning  capacity  as  transpor- 
tation facilities  being  the  basis  of  the  price  paid  for 
them. 

(6)  Combination  of  smaller  roads  into  systems 
has  increased  the  density  of  traffic  on  certain  lines. 
Such  increase  has  made  it  possible  to  consider  ex- 
penditure for  making  improvements  in  the  physical 
factors  of  distance,  curvature,  and  grade,  for  the 
purpose  of  reducing  operating  expense.     When  the 
saving  in   operating   expense   is   greater  than   the 
interest  charge  on  the  capital  required  to  improve 
the  operating  conditions,  the  improvement  is  gener- 
ally undertaken. 

(7)  The  conditions  surrounding  the  reconstruc- 
tion of  the  railroad  are  very  different  from  thosq 
attending  the  original  construction.    Capital  is  avail- 
able, as  there  is  a  certain  definite  traffic  to  be  pro- 
vided for  by  the  money  which  is  to  be  expended. 
Credit  is  good  for  the  reason  that  reconstruction  is 
undertaken  only  on  account  of  an  increased  paying 
business,  the  return  on  the  money  being  assured,  be- 
cause the  work  is  not  undertaken  unless  it  saves 
more  in  operating  expense  than  it  costs  in  interest. 

In  consequence,  the  character  of  the  improvement 
is  very  different  from  that  of  the  original  road,  econ- 
omy in  operation  being  the  controlling  factor  and 
not  the  capital  available.  All  structures  are  of  a 
permanent  nature,  the  equipment  of  greater  ca- 
pacity, and  the  motive  power  of  greater  size  and 
power,  which  means  that  the  cost  of  everything  on 
the  railroad  is  very  much  increased. 

It  is  this  condition  that  is  responsible  for  the  larger 
present  capitalization  of  reconstructed  lines  than  ob- 


CONSTRUCTION-RECONSTRUCTION      113 

tained  before  such  reconstruction  was  demanded  by 
increased  density  of  traffic. 

(8)  The  first  reconstruction  occurred  when 
small  isolated  roads  were  formed  into  smaller  sys- 
tems. The  combining  of  these  into  larger  systems 
necessitated  further  improvements  of  lines  thereto- 
fore reconstructed,  that  is,  some  lines  have  been  re- 
constructed in  whole  or  in  part  more  than  once,  and 
the  process  will  continue  so  long  as  the  business  of 
the  country  progresses  and  the  transportation  facil- 
ities are  kept  abreast  of  it. 


CAPITALIZATION 

Functions  of  Transportation  Companies 

A  Railroad  Company  has  three  separate  and 
distinct  functions  in  transporting  passengers  and 
freight.  It  supplies: 

(1)  A  road  over  which  the  vehicles  of  transpor- 
tation may  travel. 

(2)  A  vehicle  and  the  motive  power  to  carry 
passengers  and  freight  over  the  road. 

(3)  An  organization  to  conduct  transportation 
and  to  maintain  the  road  and  equipment. 

This  division  of  the  work  of  a  railroad  company 
into  its  fundamental  parts  must  be  made  to  obtain 
an  understanding  of  its  financial  organization. 

The  furnishing  of  a  road  involves  the  acquiring 
of  land  upon  which  to  construct  it,  the  excavation 
of  cuts  and  tunnels,  the  building  of  embankments, 
the  construction  of  bridges  and  culverts  and  of  the 
track  that  is  laid  upon  them.  It  must  provide  sta- 
tions through  which  to  receive  and  deliver  freight, 
and  accommodate  its  passengers;  buildings  to  house 
its  engines  and  cars,  water  and  fuel  stations  to  oper- 
ate them,  and  shops  in  which  to  repair  them ;  build- 
ings to  protect  its  tools  and  store  supplies.  It  must 
provide  means  for  carrying  public  highways,  private 
roads  and  other  railroads  across  its  roadbed,  and 
many  other  things  of  a  like  nature. 

The  money  spent  in  providing  all  of  these  struc- 
tures and  things  is  irrevocably  committed — a  perma- 
nent investment  in  a  transportation  facility  that  is 
to  be  operated  as  long  as  transportation  is  required 
— that  is  in  perpetuity,  as  far  as  we  now  know.  The 
term  of  a  bond,  which  is  an  evidence  of  such  an  in- 
vestment, may  therefore,  with  safety  be  a  long 


CAPITALIZATION  115 

•;     :.:.. 

period  of  time.  In  the  United  States  it  is  usually 
from  30  to  100  years. 

The  furnishing  of  a  vehicle  and  the  motive  power 
requires  the  providing  of  locomotives,  passenger  and 
freight  cars  and  such  floating  equipment  as  transfer 
barges,  boats  and  tugs.  The  money  spent  in  pro- 
viding this  road  and  floating  equipment  is  an  invest- 
ment, the  life  of  which  should  not  exceed  the  years 
of  useful  service  of  the  equipment  for  which  the 
money  is  expended. 

If  the  useful  life  of  the  engine  or  car  is  20  years 
or  25  years  and  it  then,  through  use,  depreciation 
or  obsolescence,  is  no  longer  serviceable  in  transpor- 
tation, the  term  of  the  bond  (or  equipment  trust  cer- 
tificate) which  is  the  evidence  of  the  investment, 
should  not  exceed  20  or  25  years,  and  the  safety  of 
the  investment  demands  that  it  shall  be  considerably 
less.  It  is  usually  from  10  to  15  years  in  this  country. 

To  furnish  an  organization  to  operate  the  equip- 
ment over  the  road  and  to  maintain  the  road  and  the 
equipment,  the  railroad  company  must  be  allowed 
to  collect  charges  sufficient  in  the  aggregate  to  pay 
for  the  labor  and  supplies  required : 

(a)  In  conducting  such  transportation; 

(b)  In  repairing  and  maintaining  the  roadbed, 
structures  and  equipment,  and  to  provide  for: 

(c)  Payment  of  interest  on  the  money  invested 
in  the  roadbed  and  equipment ; 

(d)  A   profit   for  the    company   providing   the 
facilities  and  operating  them. 

Stockholders 

The  money  needed  to  pay  the  cost  of  constructing 
the  roadbed,  structures  and  equipment  was  obtained, 
in  the  earlier  periods  of  railroad  construction,  by 
subscription  to  the  shares  of  the  railroad  company. 
The  share  holders  were  partners  in  the  enterprise 


116  VALUATION  AND  RATES 

and  furnished  all  of  the  money  required  to  provide 
these  facilities  ready  for  operation. 

The  difference  between  the  shareholders  of  a  rail- 
road and  of  partners  in  an  ordinary  business  enter- 
prise is  that  the  liability  of  the  former,  as  to  the 
debts  of  the  corporation,  is  limited  to  a  certain  speci- 
fied amount — the  face  value  of  the  shares  they  hold. 

This  form  of  financing  was  simplicity  itself;  the 
holder  of  each  share  of  stock  contributed  the  same 
amount  toward  the  cost  of  constructing  the  railroad 
and  received  the  same  proportion  of  the  profits  aris- 
ing from  its  operation  as  every  other  holder  of  a 
similar  share. 

The  capitalization  of  some  very  important  systems 
is  still  made  up  in  larger  part  of  these  shares  of 
stock,  but  there  is  not  a  railroad  in  this  country 
whose  capitalization  is  represented  entirely  by 
shares.* 

Early  Financing 

The  first  roads  constructed  in  this  country  tra- 
versed comparatively  thickly  settled  communities 
which  had  been  developed  industrially  to  a  consider- 
able extent.  In  consequence  traffic  was  assured  in  ad- 
vance of  their  construction,  and  also  an  immediate 
return  on  the  money  invested  in  them.  The  earlier 
operation  of  railroads  in  England  had  demonstrated 
their  ability  to  earn  a  fair  return  on  the  money 
invested  in  them  and  such  investments  were  there- 
fore attended  by  little  risk. 

So  long  as  the  construction  was  confined  to  thickly 
settled  and  industrially  developed  districts,  this 
mode  of  financing  answered  all  of  the  requirements. 
It  soon  became  apparent  that  the  railroads  could 
be  employed  in  developing  districts  thinly  settled 
and  with  few  existing  industries,  and  that  such 


*The  D.  L,.  &  W.  had  a  funded  debt  of  only  $334  per  mile  in 
1914. 


CAPITALIZATION  117 

enterprises  would  eventually  be  profitable,  although 
the  return  on  the  investment  would  not  be  imme- 
diate. 

As  related  in  the  Historical  chapter,  the  supply 
of  capital  has  always  been  insufficient  in  this  country 
for  the  needs  of  railroad  construction.  Any  method, 
then,  that  provided  additional  capital  or  credit  that 
could  be  employed  in  extending  existing  railroads 
was  a  public  benefit. 

Evidently  the  plan  of  securing  capital  by  subscrip- 
tion did  not  fully  employ  the  credit  of  the  railroad, 
for  the  physical  property  produced  through  the  ex- 
penditure of  original  cash  subscriptions  could  be 
used  as  security  in  borrowing  money  for  extensions 
or  betterments  of  the  property. 

Bonds 

Borrowing  by  railroads  in  their  corporate  capacity 
had  its  source  in  the  following  conditions,  which 
were  found  to  be  incident  to  railroad  construction 
and  operation: 

(1)  The  final  cost  of  railroads,  through  the  con- 
tingencies attending  the  construction  of  the  work, 
exceeded  the  estimates  of  cost  on  which  the  original 
financing  was  based. 

(2)  The  temporary  construction,    (necessitated 
by  the  limited  capital  available  and  the  high  cost 
of  permanent  construction  in  districts  remote  from 
other  transportation  facilities  at  the  time  of  original 
construction)    had   to    be   replaced   by   permanent 
structures  when  the  traffic  density  of  the  line  in- 
creased to  an  extent  justifying  the  necessary  expen- 
diture. 

(3)  After  the  railroad  was  completed  and  ready 
for  operation,  it  needed  a  cash  working  capital  with 
which  to  conduct  its  business,  which  necessity,  often, 
had  not  been  provided  for  in  the  original  financing. 


118  VALUATION  AND  RATES 

To  provide  for  these  necessities,  money  was  bor- 
rowed and  the  loan  secured  by  a  mortgage  on  the 
physical  property  and  franchise  of  the  railroad  com- 
pany. The  evidence  of  this  indebtedness  is  the  rail- 
road bond. 

It  will  be  understood  from  the  foregoing,  that  the 
holder  of  a  bond  is  a  creditor  of  the  railroad,  as 
distinguished  from  a  holder  of  the  stock,  who  is  the 
owner  of  the  railroad,  and  responsible  for  its  opera- 
tion and  management. 

The  first  railroad  shares  had  paid  a  return  of  8% 
on  an  investment  in  which  little  risk  was  involved. 
These  new  enterprises,  however,  were  speculative, 
to  a  greater  or  less  extent,  and  required  a  larger 
return  on  the  investment  on  that  account. 

To  stimulate  the  construction  of  new  lines,  inves- 
tors were  offered  a  share  of  anticipated  profits. 
They  were  given  bonds  bearing  6  to  8%  interest  for 
their  actual  investments,  which  were  secured  by  the 
physical  property  which  their  investment  produced, 
and  in  addition  a  bonus  of  stock. 

As  heretofore  shown  in  the  chapter  on  Promotion, 
these  investments  were,  in  many  cases,  still  further 
secured  by  other  improvements  and  land,  for  which 
no  bonds  were  issued — local  investors  accepting 
stock  for  their  investments. 

State  Aid 

The  people  of  the  interior  districts — those  lying 
beyond  the  then  constructed  roads  and  having  no 
means  of  cheap  intercommunication — appreciating 
the  benefits  which  cheap  transportation  had  con- 
ferred on  those  communities  enjoying  it,  adopted 
means  to  provide  themselves  with  railroads. 

Through  their  state  legislatures,  they  encouraged 
and  assisted  new  railroad  enterprises  by  subscribing 
directly  to  their  bonds,  or  guaranteeing  the  interest 


CAPITALIZATION  119 

on  them.  This  method  of  financing  otherwise  impos- 
sible enterprises,  perhaps  more  than  any  other  one 
thing,  was  responsible  for  the  fact  that  bonds  became 
the  most  important  part  of  railroad  capital. 

It  must  be  remembered  in  this  connection,  how- 
ever, that  a  large  number  of  the  railroads  have  in  the 
past,  and  at  the  present  time  do  sell  their  stock  at 
and  above  par  in  obtaining  required  additional  cap- 
ital. The  general  impression  that  only  the  bond 
(funded  debt)  portion  of  railroad  capital  represents 
actual  cash  expenditure  is  entirely  erroneous. 

Ratio  of  Stocks  and  Bonds 

Originally  some  of  the  states  prohibited  the  issue 
of  bonds  in  greater  amount  than  the  total  amount 
of  stock,  on  the  principal  that  a  share  of  stock  rep- 
resented an  amount  equal  to  its  face  value,  which 
was  actually  invested  in  the  property  and  that  the 
property  acquired  through  such  investment  was  the 
sole  security  for  the  payment  of  all  borrowed  money ; 
hence  bond  issues  would  not  be  secured  if  they  ex- 
ceeded in  amount  the  stock  issue. 

In  1913  the  state  of  Massachusetts,  at  the  time 
of  placing  the  railroad  companies'  finances  under 
the  supervision  of  the  public  service  commission, 
changed  its  laws  and  permitted  bond  issues  of  twice 
the  amount  of  stock.  Some  other  states  allow  bond 
issues  to  the  extent  of  three  times  the  amount  of 
stock. 

The  following  table  shows  the  division  of  the  total 
capitalization  of  all  railroads  in  the  United  States, 
June  30,  1914,  earning  more  than  $100,000  annually. 

Funded  Debt 

Mortgage  Bonds $  8,496,370^538 

Collateral  Trust  Bonds 1,182,683,530 

Plain  Bonds,  Debentures,  and  Notes     1,142,016,070 


120  VALUATION  AND  RATES 

Income  Bonds 254,230.505 

Miscellaneous  Obligations 72,700,640 

Equipment  Bonds 418,540,270 


Total  Funded  Debt $11,566,541,553 

Stock 

Common  Stock $  7,304,479,846 

Preferred  Stock 1,376,279,858 


Total  Stock $  8,680,759,704 

Total  Capitalization 20,247,301,257 

Funded  Debt  Percentage  of  Total.  .57.13% 

Stock  Percentage  of  Total .42.87% 

Certain  portions  of  this  total  capitalization  are 
held  by  the  railroad  companies,  as  the  following 
statement  shows: 

Stock  Funded   Debt 

Total  Outstanding.$8,680,759,704     $11,566,541,553 
Held  by  Railways.    2,638,783,512         1,849,423,832 


Not  held  by  Rail- 
ways  $6,041,976,192     $  9,717,117,721 

Average  per  mile  (not 

held  by  railways)         $25,492  $41,169 

Total  Actual  Capitalization  per  Mile  of  Line .  $66,661 

The  item  of  "Held  by  Railways"  is  deducted  be- 
cause there  are  duplications  of  securities — that  is, 
operating  systems  issue  securities  based  on  the  secur- 
ities of  their  subsidiaries. 

Combination 

The  result  of  the  local  and  state  encouragement 
of  railroad  construction  was  a  large  number  of  local 
roads,  operating  independently  in  their  own  terri- 
tories, having  little  relation  with  each  other.  In  the 
late  50's  there  were  only  a  few  roads,  like  the  New 


CAPITALIZATION  121 

York  Central  and  the  Pennsylvania,  with  more  than 
100  miles  of  line,  and  these  two  had  only  about  500. 

It  became  apparent  to  the  shrewder  railroad  man- 
agers that  the  combination  of  these  small,  unrelated 
lines  would  be  profitable,  as  increased  traffic  density 
would  decrease  operating  expense  and  improve  the 
traffic  situation. 

These  combinations  of  smaller  roads  into  small 
systems  first,  and  later  into  large  systems  by  further 
combination  of  the  smaller  ones,  were  effected  in 
various  ways.  When  the  consent  of  all  the  stock- 
holders of  the  two  properties  which  were  to  be 
combined  could  be  obtained,  they  were  merged  into 
one  corporation.  In  other  instances,  one  road  leased 
another,  operating  it  as  part  of  its  own  road  and 
paying  either  a  fixed  rental  or  one  based  on  the 
earnings  of  the  leased  property.  In  still  other  in- 
stances, one  road  bought  a  majority  of  the  stock 
of  another  road  for  the  purpose  of  controlling  its 
operation. 

In  order  to  avoid  paralleling  an  operating  road, 
traffic  agreements  have  often  been  made,  by  which 
one  road  uses  in  part  certain  tracks,  terminals,  or 
other  facilities  of  another  road  in  common  with  it, 
at  some  agreed  rental  and  under  conditions  provided 
for  by  agreement.  Some  roads  are  operated  jointly 
by  two  or  more  roads,  both  of  the  latter  securing  an 
outlet,  or  connection,  which  would  otherwise  neces- 
sitate a  duplication  of  transportation  facilities. 

In  effecting  these  combinations,  it  was  inevitable 
that  in  some  instances  certain  properties  necessary 
to  a  proposed  combination  of  several  lines  were  pur- 
chased at  prices  which  exceeded  their  cost — that  is, 
they  were  sold  on  the  basis  of  their  value  to  the 
purchaser,  rather  than  on  the  cost  to  the  seller. 

It  is  the  same  proposition  the  farmer  encounters 
when  he  buys  forty  acres  of  land  to  "square  up"  his 


122  VALUATION  AND  RATES 

farm  or  the  manufacturer  when,  through  expanding 
business,  additional  land  is  required  for  extending 
his  plant.  All  of  them  pay  on  the  basis  of  their 
necessity. 

On  the  other  hand,  many  roads — a  great  many 
more  than  of  the  class  just  mentioned — were  pur- 
chased, in  forming  these  combinations,  at  prices  far 
below  what  they  had  cost  their  original  owners  to 
construct.  The  circumstances  which  made  this  pos- 
sible have  been  explained  in  the  chapter  on  Con- 
struction and  Reconstruction. 

It  will  be  noted,  however,  that  in  all  instances, 
the  railroads  were  sold  on  the  basis  of  their  value 
as  transportation  facilities — not  on  the  basis  of  orig- 
inal cost,  nor  of  their  physical  value. 

Holdings  of  the  Securities  of  Other  Railroads 

Combinations  of  roads  by  purchase  of  their  stocks 
have  been  very  much  facilitated  by  the  use  of  Col- 
lateral Trust  Bonds*  in  financing  such  operations. 
A  road  with  a  good  dividend  record  can  sell  its 
collateral  trust  bonds,  based  on  the  securities  of  the 
purchased  road,  and  so  obtain  control  of  it  with  the 
expenditure  of  comparatively  little  money. 

Inasmuch  as  the  combination  reduces  operating 
expense  and  betters  the  traffic  conditions,  such  secur- 
ities are  usually  desirable,  particularly  if  some  guar- 
antee of  the  bond  or  advantageous  conversion  clause 
is  added. 

It  has  often  been  necessary,  in  effecting  the  com- 
bination of  two  or  more  roads,  to  construct  new  lines 
to  connect  them.  The  price  of  the  securities  of  an 
operating  road  would  usually  be  affected  injuriously 
if  it  undertook  the  construction  of  any  considerable 


*These  are  a  mortgage  issued  by  one  railroad  company  on  the 
stocks  and  bonds  of  another  company,  deposited  with  a  trustee. 
They  depend  for  interest  upon  revenues  that  accrue  from  these 
deposited  securities. 


CAPITALIZATION  123 

mileage  of  connecting  line,  (or  extension)  in  its  cor- 
porate capacity.  For  this  reason  such  work  is  per- 
formed under  a  separately  incorporated  subsidiary 
organization,  whose  securities,  after  the  construction 
has  been  completed,  are  purchased  with  the  collat- 
eral trust  bonds  of  the  parent  corporation. 

Railroads  have  often  purchased  a  small  portion 
of  the  stock  of  their  important  connections,  to  obtain 
representation  on  their  boards,  in  order  to  protect 
their  traffic  relations  with  such  connections.  These 
holdings  are  usually  only  a  small  part  of  the  total 
issue  of  securities  of  these  connections. 

It  will  be  noted  that  by  purchasing  the  securities 
of  the  lines  which  it  seeks  to  combine  with  its  own 
system,  and  those  of  the  companies  through  which 
it  constructs  necessary  connecting  lines  and  exten- 
sions, the  parent  company  accumulates  a  greater  or 
less  amount  of  the  securities  of  "other  railroad"  com- 
panies. 

It  is  difficult  to  understand  why  this  practice  of 
owning  the  securities  of  "other  railroads"  is  so 
severely  censured  by  the  critics  of  railroad  financial 
management,  as  the  combination  of  the  lines  is  bene- 
ficial to  both  the  public  and  the  investors  in  railroad 
securities.  On  a  simple  relation  of  the  facts,  the 
whole  arrangement  seems  well  adapted  for  accom- 
plishing what  is  desired.  Certainly  the  object  to 
be  attained  is  unobjectionable  from  any  standpoint. 

There  is  no  doubt  that  this  method  of  financing 
and  control  may  be  used  improperly,  but  the  same 
is  true  of  any  other.  There  is  nothing  wrong  in  one 
railroad  company  owning  the  securities  of  another, 
unless  there  is  some  particular  circumstance  that 
makes  it  so.  The  wholesale  condemnation  and  sus- 
picion of  such  ownership,  without  regard  to  the  cir- 
cumstances attending  it,  is  unjust  and  not  warranted 
generally  by  the  facts. 


124  VALUATION  AND  RATES 

Holding  Companies 

The  practice  of  bringing  large  mileages  of  various 
systems  of  railroad  under  one  general  management, 
exercising  control  through  small  holdings  (nom- 
inally) of  stock,  has  also  been  very  severely  criti- 
cised and  characterized  as  "high  finance,"  and  as 
being  dangerous  and  prejudicial  to  the  interests  of 
the  general  public  and  to  investors  in  the  securities 
of  the  railroads  concerned. 

The  financial  authority  of  the  many  constituent 
railroads  of  a  large  system  must  be  concentrated 
somewhere,  and  it  must  be  absolute  to  be  effective. 
If  it  were  necessary  to  consult  the  holders  of  the 
securities  of  each  subsidiary  company,  the  manage- 
ment of  all  large  systems  would  be  embarrassed  to 
such  an  extent  that  it  could  not  hope  to  be  effective. 
Holding  companies,  when  properly  employed,  are 
used  to  concentrate  financial  authority  of  many  re- 
lated companies. 

The  Atlantic  Coast  Line  Company  is  such  a  hold- 
ing company.  It  has  financial  control  of  the  Atlan- 
tic Coast  Line  Railroad  Company  and  the  Louisville 
&  Nashville  Railroad  Company,  the  former  having 
21  subsidiary  companies  and  the  latter  22.  The  ag- 
gregate length  of  the  two  systems  is  about  11,000 
miles,  and  the  total  capital  approximately  $725,- 
000,000.  The  capital  of  the  holding  company  is 
$12,600,000.  Control  of  the  holding  company  could 
be  had  by  owning  $6,400,000  of  its  capital — that  is, 
$6,400,000  could  be  made  to  control  11,000  miles  of 
railroad  and  $725,000,000  of  railroad  capital. 

These  two  systems  are  not  competitive,  but  sup- 
plement each  other.  In  the  operation  of  the  prop- 
erties, the  organizations  are  entirely  independent  of 
each  other;  it  is  only  in  the  financial  management 
that  they  are  under  one  control. 


CAPITALIZATION  125 

What  essential  difference  is  there  between  such 
an  arrangement  for  financial  direction  and  say  that 
of  the  Atchison,  Topeka  &  Santa  Fe,  which  is  a 
system  of  11,000  miles  under  one  control? 

The  Louisville  &  Nashville  is  typical  of  all  large 
American  railroad  systems.  It  has  been  formed 
largely  by  the  combination  of  many  small  roads,  the 
majority  of  which  were  not  profitable  when  operated 
independently. 

These  smaller  roads  paid  high  rates  of  interest  on 
the  money  actually  invested  in  them.  In  some  cases 
they  were  not  operated  as  efficiently  as  desirable  and 
as  to  practically  all  of  them,  insufficient  revenue  from 
operation  prevented  them  from  giving  the  best  of 
service  to  the  public.  Many  of  them  for  a  large  part 
of  their  corporate  life,  were  administered  under  the 
direction  of  the  courts,  by  a  receiver. 

Both  the  Louisville  &  Nashville  and  the  Atlantic 
Coast  Line  are  honestly  administered  as  to  their  fin- 
ances, efficiently  operated  and  give  excellent  service 
to  the  public.  What  ill  effect  to  the  public,  or  to  the 
investors  interested  in  their  securities,  has  followed 
from  the  fact  that  they  are  administered  financially 
through  a  holding  company? 

The  mere  fact  that  a  group  of  dishonest  men  might 
control  such  large  interests  is  no  argument  against 
the  method.  Abuses  arising  from  mis-management 
may  be  corrected  in  the  courts,  as  the  course  of 
events  in  the  Rock  Island  System's  affairs  show.  Men, 
or  groups  of  men,  in  charge  of  small  railroads  have 
been  dishonest  quite  as  often  as  similar  men  in 
charge  of  large  railroads  systems,  and  the  same  is 
true  of  industrial  corporations. 

An  objection  based  on  the  possibilities  of  dishon- 
esty would  rest  against  any  of  cur  institutions,  such 
as  the  United  States  Supreme  Court  or  the  Interstate 
Commerce  Commission  as  well  as  against  the  hold- 
ing company. 


126  VALUATION  AND  RATES 

The  possible  damage  and  loss  which  either  of  these 
highly  respected  agencies  might  inflict  on  the  people 
whom  they  serve  is  incalculable.  The  fact  that  they 
might  do  so  does  not  deter  us  from  vesting  them  with 
our  authority.  If  they  should  prove  unfaithful  we 
would  dismiss  them  individually,  but  would  not,  for 
that  reason,  abolish  the  Court  or  the  Commission  as 
institutions. 

In  large  affairs,  particularly  in  financial  manage- 
ment, there  must  be  a  concentration  of  authority  and 
freedom  from  embarrassing  restraint.  A  holding 
company,  or  some  equivalent  method  of  control,  is 
essential,  in  some  instances,  to  efficiency  in  financial 
management  and  is  not  prejudicial  to  public  interest. 
In  the  instance  used  above  for  illustration,  it  would 
be  utterly  impracticable  to  vest  the  financial  author- 
ity of  the  system  in  the  43  constituent  railroads, 
located  in  ten  Southern  states. 

The  following  important  and  practical  advantages 
are  responsible  for  holding  companies: 

They  concentrate  the  financial  control  of  many 
subsidiary  corporations  and  hence  assure  greater 
efficiency  in  financial  management;  they  provide  a 
means  of  financing  new  construction  in  several 
states ;  they  facilitate  the  combination  and  extensions 
of  systems,  by  the  issuing  of  their  collateral  trust 
bonds,  based  on  the  securities  of  their  subsidiary 
companies;  they  widen  the  market  for  railroad  se- 
curities, as  their  bonds  are  available  for  certain  in- 
vestments, while  the  stocks  of  the  controlled  rail- 
roads are  not. 

Reconstruction 

The  combination  of  various  independent  lines  into 
systems  concentrated  traffic  along  certain  of  them, 
necessitating  their  reconstruction,  to  effect  savings 
in  operating  expense,  as  stated  in  the  previous  chap- 
ter on  Construction  and  Reconstruction. 


CAPITALIZATION  127 

The  cost  of  this  reconstruction,  which  has  been 
very  large,  is  responsible  for  practically  all  of  the 
increase  in  capitalization  of  most  railroad  systems. 
Some  other  factors,  hereafter  mentioned,  have  con- 
tributed somewhat  to  this  increase,  but  such 
amounts,  while  large  in  the  aggregate,  are  small 
relatively,  when  compared  with  actual  reconstruc- 
tion cost,  a  considerable  percentage  of  which  has 
never  been  capitalized  at  all. 

Readjustment    of    Bonded    Debt 

A  railroad  is  never  finished.  It  is  constantly  be- 
ing improved — reconstructed,  extended.  The  mod- 
ern railroad  system,  in  normal  times,  is  consoli- 
dating independent  lines  with  its  system  and  segre- 
gating others  which  its  experience  indicates  are  not 
needed  in  its  development  or  operation.  It  must 
constantly  adapt  itself  to  the  changing  conditions 
of  a  developing  country,  and  so  long  as  the  country 
progresses,  these  changes  in  its  organization  and 
additions  to  and  improvements  of  its  facilities  must 
be  expected  and  provided  for  by  its  financial  or- 
ganization. 

There  are  only  a  few  securities  in  this  country 
which  are  issued  with  perpetual  interest-bearing 
provisions;  most  investors  prefer  a  bond  providing 
for  the  payment  of  its  principal  at  some  specified 
time,  as  30  or  50  years  from  its  date  of  issue. 

It  is  not  often  intended  that  the  bond  shall  be 
actually  paid  in  cash  at  maturity  and  the  obligation 
be  discharged.  Modern  financing  contemplates  the 
payment  of  the  principal  of  railroad  bonds  by  the 
issue  of  other  bonds,  which  is  termed  refunding  the 
debt  which  the  original  bonds  represent. 

The  purpose  in  naming  a  definite  time  for  the 
payment  of  the  bond  is  to  provide  for  an  adjust- 
ment, at  stated  intervals,  of  the  rate  of  interest 
which  the  bond  pays.  If  the  current  rate  of  interest 


128  VALUATION  AND  RATES 

on  other  long  term  investments  varies  considerably 
from  the  rate  of  the  railroad  bonds,  their  market 
price  will  vary  proportionally  with  the  difference 
in  the  two  rates,  and  it  is  desirable  that  the  price 
of  bonds  be  comparatively  stable. 

The  constant  need  for  additional  railroad  capital 
to  pay  for  additions  and  betterments,  in  connection 
with  the  varying  conditions  of  the  money  market, 
results  in  securities  of  varying  rates  of  interest  and 
with  many  differing  conditions  and  a  large  mass 
of  securities  of  conflicting  and  often  of  uncertain 
relative  rights.  In  the  reorganization  of  the  Union 
Pacific  in  1895,  there  were  fifteen  different  commit- 
tees, representing  separate  interests,  owning  the  vari- 
ous classes  of  its  securities;  in  the  Atchison  Topeka 
&  Santa  Fe  reorganization  of  1889,  there  were  forty- 
one  groups  of  bondholders. 

For  these  reasons,  periodic  readjustment  of  the 
funded  indebtedness  of  all  railroad  companies  is 
an  essential  of  sound  financial  condition. 

Reorganization 

Most  of  the  railroads  of  the  country  have,  in 
whole  or  in  part,  been  through  one  or  more  reor- 
ganizations of  their  finances,  following  a  receiver- 
ship caused  by  bankruptcy.  These  financial  diffi- 
culties have  been  caused  either  by  extensions  into 
undeveloped  territory,  dissension  among  bondhold- 
ers, or  too  small  a  margin  between  net  earnings  and 
fixed  charges. 

All  of  the  long  extensions,  particularly  of  the 
Pacific  roads — those  involving  the  construction  of 
several  hundred  miles  of  line  at  one  time — have  been 
attended  by  bankruptcy.*  It  is  an  inevitable  ac- 
companiment of  such  enterprises. 


*The  extension  of  the  C.,  M.  &  St.  P.  to  the  Pacific  coast  was 
made  after  the  country  had  been  developed.  It  is,  of  course,  an 
exception  to  this  general  statement. 


CAPITALIZATION  129 

In  the  western  and  southwestern  portions  of  the 
country,  there  are  hundreds  of  miles  of  barren  ter- 
ritory— absolutely  devoid  of  traffic  before  it  is  pro- 
vided with  transportation — which  must  be  traversed 
in  reaching  the  rich  traffic  territory  of  the  Pacific 
Coast. 

Evidently  a  railroad  may  not  be  terminated  in  a 
desert,  where  there  is  no  traffic,  when  rich  traffic 
territory  lies  beyond  it.  The  lack  of  revenue  in  a 
territory  barren  of  traffic  for  some  years  following 
the  construction  period,  together  with  the  high  price 
which  must  be  paid  for  the  use  of  money  employed 
in  such  hazardous  enterprises,  have,  however,  com- 
bined to  bankrupt  all  of  them. 

The  situation  in  the  far  western  country  is  not 
analogous  to  that  of  states  east  of  the  Missouri 
River,  where  the  line  developed  its  traffic  as  it  was 
extended,  and  it  was  in  consequence  wise  to  make 
shorter  periodic  extensions,  allowing  time  in  the 
intervals  for  at  least  a  partial  development  of  the 
country  already  traversed. 

In  addition  to  the  main  line,  the  development  of 
a  territory  to  a  paying  basis  also  involves  the  con- 
struction of  a  considerable  mileage  of  branch  lines, 
whose  aggregate  cost  may  be  a  large  percentage 
of  the  total  cost  of  the  main  line.  The  Western 
Pacific,  as  it  now  exists,  is  an  example  of  a  line 
constructed  across  barren  areas  to  a  territory  rich 
in  traffic,  which  it  does  not  now  reach  for  lack  of 
developing  branch  lines. 

The  factor  of  time — time  required  for  the  devel- 
opment of  the  business  and  of  the  country — has 
operated  against  all  of  them,  without  regard  to  de- 
tails of  management  or  plan  of  financing.  This  by 
some  writers  has  been  termed  "over-expansion/' 
and  yet  it  is  an  unavoidable  accompaniment  of  rail- 
road building  of  this  kind. 


130  VALUATION  AND  RATES 

In  many  instances,  particularly  in  the  earlier  rail- 
road construction  period,  the  large  construction 
cost,  the  high  rate  of  interest  on  capital,  or  small 
earnings,  either  singly  or  in  combination,  have  made 
the  operation  of  some  roads  unprofitable.  In  such 
cases  the  only  feasible  financial  plan  is  to  scale 
down  the  funded  debt  to  such  an  extent  that  the 
net  earnings,  less  fixed  charges,  leaves  a  balance  as 
a  profit  for  operating  the  road.  Such  conditions  re- 
quire a  reorganization  of  the  whole  financial 
structure. 

It  generally  has  happened  that  the  larger  part 
of  the  bondholders  have  received  no  interest  for 
some  time  prior  to  the  reorganization.  The  stock- 
holders are  usually  required  to  pay  all  or  the  larger 
part  of  the  cash  required  to  rehabilitate  the  phys- 
ical property  and  provide  the  necessary  working 
capital  for  the  reorganized  company. 

As  the  reorganization  has  been  occasioned  by  in- 
ability to  pay  fixed  charges,  it  is  essential  that  the 
funded  debt  be  reduced,  so  that  fixed  charges  may 
be  proportionately  reduced. 

Certain  classes  of  the  junior  bonds,  in  all  reor- 
ganizations, will  be  replaced  partly  by  mortgage 
bonds  and  partly  by  stock  or  income  bonds,  the  pay- 
ment of  interest  on  the  latter  being  conditioned  by 
the  clause  "if  earned" — that  is,  a  large  part  of  the 
security  afforded  by  the  foreclosure  power  of  the 
old  bonds  is  surrendered  for  a  contingent  interest 
in  anticipated,  but  unassured  profits  of  future  op- 
eration. 

This  sacrifice  of  a  portion  of  the  security  of  the 
investment,  and  the  loss  of  interest  during  the 
period  prior  to  reorganization,  is  generally  com- 
pensated for  by  a  larger  aggregate  amount  of  bonds 
and  stock  than  the  former  amount  of  mortgage 
bonds. 


CAPITALIZATION  131 

To  illustrate,  in  the  Atchison,  Topeka  &  Santa 
Fe  reorganization  of  1895,  certain  bondholders  were 
given  $75  in  new  mortgage  bonds  and,  $40  in  in- 
come bonds — a  total  of  $115  in  securities — for  each 
$100  of  their  old  mortgage  bonds,  the  interest  pay- 
ment on  the  income  bond  being  conditioned  "if 
earned."  As  these  bondholders  had  received  no 
interest  for  three  years  prior  to  the  reorganization, 
they  were  (in  effect)  to  be  paid  defaulted  interest 
later  if  future  operations  proved  profitable. 

This  plan  reduced  the  funded  debt  25%  and  so 
was  good  financing,  but  it  increased  the  total  capi- 
talization 15%,  which,  under  the  circumstances,  was 
was  a  fair  adjustment. 

Likewise,  the  stockholders,  who  advance  cash  for 
rehabilitating  the  property  and  furnishing  working 
capital,  are  given  part  bonds  and  part  stock  for 
their  cash  and  old  stock. 

The  net  effect  of  all  reorganizations  has  been  to 
reduce  funded  debt  and  to  increase  the  total  capi- 
talization, which,  considering  the  losses  of  the  se- 
curitity  holders  prior  to  the  reorganization,  the  sur- 
render of  their  foreclosure  rights,  and  the  cash  pay- 
ments of  the  stockholders  for  reorganization  pur- 
poses, is  not  an  unfair  adjustment  of  a  difficult  sit- 
uation. 

The  increased  capitalization  following  reorgani- 
zation, has  been  more  widely  criticised  than  any 
other  one  feature  of  railroad  financing.  A  fair 
statement  of  the  conditions  obtaining  at  the  time  of 
reorganization  would  be,  that  the  adjustment,  as 
between  the  various  security  holders,  has  usually 
been  fair,  and  that  the  increased  capitalization  rep- 
resents previously  defaulted  interest  on  the  bonds 
nd  new  cash  put  into  the  property  for  the  purpose 
f  rehabilitating  it,  paying  the  floating  debt  and 
viding  a  working  capital. 


132  VALUATION  AND  RATES 

This  is  not  "high  finance."  It  is  an  adjustment 
in  railroad  finances  similar  to  those  made  every 
working  day  in  the  year  in  both  large  and  small 
undertakings  in  commercial  and  industrial  lines. 

Commissions  and  Discounts 

The  marketing  of  railroad  securities,  in  large 
amounts,  requires  the  services  of  underwriting  syn- 
dicates. Such  services  must  be  paid  for  from  the 
proceeds  of  the  sale  of  the  securities. 

In  some  instances  these  commissions  amount  to 
very  considerable  sums.  In  1903  the  Pennsylvania 
paid  a  commission  of  2y%%  on  an  issue  of  $90,000,- 
000  new  shares;  in  1905  the  same  percentage  on 
a  $100,000,000  issue  of  convertible  bonds;  in  1908, 
following  a  panic,  it  sold  its  mortgage  bonds  at  92 
to  a  syndicate  of  bankers. 

The  New  Haven  had  a  contract  with  Morgan 
&  Co.  for  underwriting  its  bonds  for  a  commission 
of  1%%;  after  the  collapse  of  the  Mellen  manage- 
ment it  paid  commissions  of  2y%%  per  cent  on  its 
6%  convertible  bonds. 

In  other  instances,  in  addition  to  the  underwrit- 
ing charges,  the  bonds  are  sold  at  a  discount.  The 
Western  Pacific,  under  financial  stress,  sold  its 
bonds,  which  were  guaranteed  by  the  Missouri  Pa- 
cific and  Denver  &  Rio  Grande,  at  the  large  dis- 
count of  20%,  realizing  40  millions  in  cash  for  50 
millions  in  bonds. 

The  amount  of  these  commissions  and  discounts 
will  vary  with  the  conditions  prevailing  in  the 
money  market  at  the  time  the  securities  are  issued. 
While  these  charges  will  be  less  for  the  stronger 
companies  than  for  the  weaker,  they  are  common 
to  all  railroad  issues  of  securities. 

It  is  evident  that  if  no  provision  is  made  for  them, 
that  repeated  readjustments  will  seriously  affect 


CAPITALIZATION  133 

the  capital  of  the  company.  Some  device  for  meet- 
ing such  charges  should  be  provided,  as  the  ex- 
penditure is  not  represented  by  any  tangible  asset 
of  the  railroad.  They  must  be  considered  also  in 
making  a  valuation  of  the  property. 

Summary 

The  following  are  the  essential  facts  relating  to 
capitalization : 

The  total  capitalization — by  which  is  meant  the 
sum  of  the  funded  debt  (represented  by  bonds) 
and  the  capital  stock  or  shares — for  the  railroads  of 
the  country,  as  a  whole,  probably  does  not  exceed 
the  present  cost  of  the  property,  that  is,  its  original 
cost  plus  what  has  since  been  expended  upon  it  in 
betterments  and  improvements. 

The  capitalization  of  some  systems  is  less  than 
actual  cost  on  account  of  the  construction  of  new 
and  reconstruction  of  old  lines  out  of  earnings — no 
additions  to  capital  having  been  made  to  cover  the 
cost  of  such  work. 

Some  systems,  through  purchase  of  bankrupt  and 
other  railroads,  at  prices  much  below  their  cost, 
have  a  total  capitalization  less  than  the  actual  cost 
of  the  railroads  which  such  capitalization  covers. 

Only  in  isolated  cases  does  the  funded  debt  alone 
equal  the  present  cost  of  the  physical  property  of 
the  railroad. 

In  some  cases,  through  large  issues  of  common 
stock,  the  total  capitalization  exceeds  actual  pres- 
ent cost.  The  percentage  of  mileage  of  such  roads 
to  the  total  mileage  of  the  country  is  small. 

As  a  corollary  of  the  preceding  propositions,  the 
capitalization  of  any  particular  road  does  not  nec- 
essarily bear  any  relation  to  its  actual  present  cost. 

The  practice  of  one  railroad  owning  the  securities 
of  another  is  generally  caused  by  necessities  of 


134  VALUATION  AND  RATES 

financing  in  combining  various  railroads  or  in  ex- 
tending existing  systems.  As  the  combinations  are 
in  the  interest  of  the  public  and  the  railroad  in- 
vestors, there  is  nothing  improper  in  the  practice, 
unless  there  is  some  circumstance — applicable  to 
that  particular  situation — that  makes  it  so.  General 
condemnation  of  such  ownership,  therefore,  is  not 
warranted. 

The  organization  of  a  holding  company  does  not 
involve  any  principle  inherently  wrong.  The  chief 
objection  that  has  been  urged  against  them  is  the 
possibility  of  using  them  improperly.  The  same  ob- 
jections may  be  made  as  to  our  most  cherished  ad- 
ministrative and  judicial  institutions.  Some  of  our 
most  efficient  railroad  systems,  which  are  controlled 
financially  through  a  holding  company,  are  hon- 
estly administered,  efficiently  operated  and  give  ex- 
cellent service  to  the  public  and  are  the  best  argu- 
ment in  justification  of  this  method  of  financial  man- 
agement. 

The  increased  capitalization  following  reorgani- 
zation usually  represents  an  adjustment  of  previ- 
ously defaulted  interest  on  bonds  and  cash  payments 
for  rehabilitating  the  property,  for  discharging  the 
floating  debt  and  for  providing  working  capital. 
The  methods  which  have  been  used  in  reorganiza- 
tions are  not  those  of  "high  finance,"  but  are  sim- 
ilar in  nature  to  e very-day  adjustments  in  large 
and  small  undertakings  in  commercial  and  indus- 
trial lines. 

The  increased  capitalization  per  mile  shown  by 
the  statistics  of  the  last  twenty  years,  is  due  almost 
wholly  to  the  expenditures  for  reconstruction  and 
other  beneficial  improvements  necessitated  by  in- 
creased traffic  density. 

Unless  provision  is  made  in  rates  for  the  pay- 
ment of  commissions  and  discounts  incident  to 


CAPITALIZATION  135 

financing  extensions,  reconstruction,  readjustment, 
and  reorganization,  such  charges  will  seriously  af- 
fect the  capital  account.  These  charges  must  be 
considered  also  in  making  the  valuation  of  the  prop- 
erty of  railroads. 

The  following  table,  showing  the  capitalization 
per  mile  of  fifty  prominent  railroads  for  the  year 
1914,  divided  as  to  funded  debt,  preferred  and  com- 
mon stock,  will  be  interesting  in  connection  with 
this  statement: 

Capitalization    of  Fifty    Important    Railroads 

(Compiled  from  publication  of  Kissell,  Kinnicutt  &  Co.,  Brokers, 

Chicago  and  New  York.) 
*Year  Ended  June  30,  1914. 

Per  Mile  of  Line  Operated. 

Average  Pre-  Com-   Total 

Railroad —  Miles      Funded  f  erred  mon  Capital  - 

Operated.    Debt.    Stock.  Stock,  ization. 

Atchison,  Topeka  &  Santa  Fe.  10,908  $28,712  $10,467  $17,952  $57,131 

Atlantic  Coast  Line 4,646     28,536  44  14,541     43,121 

Baltimore   &   Ohio 4,478     88,394     13,146  33,947  135,486 

Boston  &  Maine 2,252     39,451       1,399  17,542     58,482 

Buffalo,  Rochester  &  Pittsburg      581     51,184     10,327  18,072     79,583 

Canadian  Pacific 11,825     20,509       6,615  21,987     49,111 

Central  Railroad  of  New  Jersey     678     68,246     40,467108,713 

Chesapeake  &  Ohio 2,346     74,692     27,767  101,459 

Chicago  &  Alton 1,033     83,135         x841  18,918  121,813 

z!8,919 

Chicago,  Burlington  &  Quincy  9,139     22,236     12,128     34,363 

Chicago  Great  Western 1,496     25,563     29,504  30,245     85,312 

Chicago,  Milwaukee  &  St.  Paul  9,684     34,418     11,963  12,066     58,447 

Chicago  &  Northwestern 8,070     26,245       2,775  16,123     45,143 

*  Cleveland,  Cincinnati,  Chicago 

&  St.  Louis 2,381     40,233       4,199     19,763     64,195 

Colorado  &  Southern 1,866     33,283     t4,555     16,613     59,006 

$4.555 
*Delaware  &  Hudson 904     68,938     47,016  115,954 

*  Delaware,      Lackawanna      & 

Western    958          334     44,130     44,464 

Denver  &  Rio  Grande 2,583     47,868     19,270  14,712     81,850 

Erie    2,257  110,846  f21,219  49,791  188,940 

$7.084 

Great    Northern 7,781     38,650     29,700  68,350 

Hocking  Valley  351     76,054     31,339  107,393 

*Fiscal  year  of  railroads  showing  this  prefix  ends  December  31, 
1914.  xPrior.  zPreferred.  fFirst  preferred.  JSecond  preferred. 
5 Leased  line.  kCapital  stock. 


136 


VALUATION  AND  RATES 


Per  Mile  of  Line  Operated. 


Average 
Railroad—                          Miles 

Funded 

Pre- 
ferred 

Com-  Total 
mon  Capital  - 

Operated. 

Debt. 

Stock. 

Stock. 

ization. 

Illinois    Central  

4,768 

41,372 

§2,095 

22,922 

66,389 

Kansas  City  Southern  

827 

58,104 

25,393 

36,275 

119,773 

Lehigh    Valley  

1,440 

53,563 

74 

42,015 

95,652 

Louisville  &  Nashville  

4,937 

37,363 

14,364 

51,727 

Minneapolis  &  St.  Louis  

1,646 

27,069 

3,543 

9,238 

39,850 

Missouri,  Kansas  &  Texas  .... 

3,825 

36,806 

3,398 

16,544 

56,748 

Missouri  Pacific  System  

7,284 

41,881 

11,354 

53,235 

*New  York  Central  

3,774 

103,872 

59,773 

163,645 

*New    York,    Chicago    &    St. 

Louis  

523 

54,822 

9,560 

26,768 

112,182 

21.032 

New    York,     New    Haven     & 

Hartford  

2,046 

117,171 

87,980 

205,151 

New  York,  Ontario  &  Western. 

568 

53,947 

7 

102,313 

156,267 

Norfolk  &  Western  

2,036 

54,840 

11,296 

52,927 

119,063 

Northern  Pacific  

6,325 

47,802 

39,209 

87,011 

*Pennsylvania  

4,511 

52,529 

110,663 

163,192 

*Pittsburg,  Cincinnati,  Chicago 

&    St.   Louis  

1,472 

48,697 

20,323 

25,540 

94,560 

Reading  System  

1,020 

48,447 

k41,648 

90,095 

Rock  Island  Co.  (C.,  R.  I.  &  P.) 

8,205 

35,141 

9,141 

44,282 

'Rutland   

468 

24,964 

19,352 

426 

44,742 

St.   Louis   Southwestern  

1,735 

32,587 

11,466 

9,426 

53,479 

St.  Louis  &  San  Francisco  .... 

5,259 

55,733 

1949 

5,513 

65,237 

$3,042 

Seaboard  Air  Line  

3,084 

36,243 

7,747 

12,036 

56,026 

Southern  Pacific   

10,422 

56,075 

26,162 

82,237 

Southern  Railway  

7,032 

35,521 

8,532 

17,064 

61,117 

Toledo,  St.  Louis  &  Western  .  . 

450 

64,155 

22,198 

22,198 

108,551 

Union    Pacific  

7,597 

43,983 

13,103 

29,269 

86,355 

2,514 

43,434 

15,592 

21,161 

80,187 

Western  Maryland  

661 

97,732 

15,172 

74,779 

187,683 

Wheeling  &  Lake  Erie  

459 

95,105 

10,864 

43,573 

175,671 

26,129 

Wisconsin  Central  

1,123 

36,017 

10,033 

14,369 

60,419 

VALUATION 
General 

Valuations  of  property  are  made  for  various  pur- 
poses. The  valuation  of  steam  railroad  property  is 
made  usually  for  either  of  the  following  purposes: 

Taxation. 
Financing. 

Sale,  Consolidation  or  Segregation  of  one  or  more 
properties. 

Lease — Trackage  rights. 
Establishing  a  system  of  accounting. 
Rate  Regulation. 

The  State  of  Michigan  was  the  first  to  undertake 
the  valuation  of  railroad  property  for  the  purpose 
of  establishing  the  taxable  value.  Later  the  State 
of  Wisconsin,  under  a  clause  in  its  taxing  laws  which 
provided  for  the  taxing  of  railroad  property  on  the 
same  basis  as  other  property  in  its  vicinity,  valued 
all  of  the  railroads  in  that  state.  These  valuations 
were  also  used  in  connection  with  rate  regulation. 

In  procuring  additional  capital  for  railroad  pur- 
poses, it  is  becoming  more  the  general  practice 
among  banking  interests  to  require  a  valuation  of 
the  physical  property  used  as  the  basis  for  such 
financing. 

In  1912  the  Canadian  Commission  required  the 
Canadian  Pacific  Railway  to  have  its  property  in 
the  Province  of  Ontario  valued,  before  allowing  a 
large  issue  of  new  securities.  Very  often  bonds  are 
issued  secured  by  some  terminal,  bridge  or  large 
yard,  and  the  specific  property  mortgaged  is  valued 
to  determine  the  margin  of  safety  of  the  loan. 


138  VALUATION  AND  RATES 

When  one  railroad  company  is  consolidated  with 
another,  the  relative  values  of  the  physical  proper- 
ties, under  some  circumstances,  will  affect  the  agree- 
ment providing  for  the  consolidation. 

In  some  instances,  mining  and  lumbering  com- 
panies have  owned  both  the  mine  or  timbered  area 
and  the  railroad  serving  it.  After  the  country  has 
developed  to  such  an  extent  that  it  has  become  an 
important  public  carrier,  the  State  and  Interstate 
Commerce  Commissions  have  demanded  the  segre- 
gation of  the  railroad  operation  from  that  of  the 
mining  or  other  industry  associated  with  it. 

The  Mississippi  River  and  Bonne  Terre  Rail- 
road, in  the  lead  district  of  eastern  Missouri,  is  an 
instance  of  this  kind,  the  railroad  owned  by  the 
same  corporation  that  owned  the  mines  and  smelt- 
ers being  segregated  entirely  from  the  mining  in- 
terest in  1913,  which  necessitated  the  valuation  sep- 
arately of  all  of  the  railroad  property. 

Often  one  railroad  leases  its  line,  or  some  fa- 
cility, for  operation  by  another.  In  order  to  de- 
termine the  fair  rental  for  such  use,  the  property  is 
valued  and  the  rental  is  made  an  amount  giving 
a  certain  agreed  percentage  (interest  on  the  invest- 
ment) of  the  value  of  the  property  used. 

The  Grand  Trunk  and  Wabash  Railroads  operate 
jointly  the  line  belonging  to  the  former,  extending 
from  Detroit,  Michigan,  to  Buffalo,  N.  Y.,  and 
Niagara  Falls,  Ontario.  All  facilities  are  used 
jointly  and  the  Wabash  Railroad  pays  for  the  use 
of  the  property  a  certain  agreed  percentage  on  the 
physical  value,  such  physical  value  having  been  de- 
termined by  a  detailed  valuation. 

The  Interstate  Commerce  Commission  requires 
that  all  railroad  property  accounts  be  kept  in  a 
prescribed  form,  which  provides  for  more  than  fifty 
headings  of  accounts,  as  grading,  bridging,  rails, 
ties,  locomotives,  passenger  cars. 


VALUATION  139 

As  to  such  items  as  grading,  bridging  and  many 
others,  it  is  not  possible  for  many  roads  to  segre- 
gate these  various  items  from  their  total  cost  of  road, 
and  in  order  to  do  so  the  physical  property  is  valued 
in  detail.  The  Manufacturers  Railroad,  a  terminal 
road  located  in  St.  Louis,  Mo.,  was  valued,  and  the 
values  determined  were  used  as  a  basis  for  its  ac- 
counting. 

Capitalization — Valuation — Rates 

The  following  discussion  of  the  Federal  valuation 
of  the  property  of  the  carriers  is  presented  in  con- 
nection with  the  subject  of  railroad  rates.  In  fact, 
the  Valuation  Act  passed  by  Congress  was  enacted 
mainly  for  the  purpose  of  facilitating  intelligent  rate 
regulation  by  the  Interstate  Commerce  Commission. 
It  has  a  further  interest  in  the  fact  that  a  possible 
outcome  of  valuation  and  the  discussion  it  will  entail 
may  be  final  government  ownership,  in  some  form, 
of  the  property  of  the  carriers.** 

The  immediate  result  of  the  valuation  will  proba- 
bly be  felt  less  in  these  two  directions,  however,  than 
in  the  matter  of  the  capitalization  and  credit  of  the 
carriers.  As  shown  in  a  following  chapter,  the  re- 
lation of  the  value  of  the  property  employed  in 
transportation  to  the  rates  charged  therefor,  is  gen- 
eral only  being  applicable  to  the  schedule  of  rates 
as  a  whole,  rather  than  to  any  particular  rate,  or 
class  of  rates,  or  rates  between  particular  points  or 
territories. 

In  the  opinion  of  the  writer,  based  on  a  consid- 
erable practical  valuation  experience,  a  fair  valua- 
tion of  the  property  of  the  carriers  will,  in  nearly  all 
cases  and  certainly  as  to  a  majority  of  them,  disclose 
a  larger  amount  as  the  actual  present  value  or  worth 

**The  writer  does  not  believe  that  government  ownership  is 
either  probable  or  desirable. 


140  VALUATION  AND  RATES 

of  railroad  property  than  is  represented  by  the  pres- 
ent capitalization.  Such  a  valuation,  established 
under  Government  authority,  should  therefore  serve 
to  strengthen  the  credit  of  all  such  railroads,  as, 
after  it  has  been  completed,  investors  may  know  the 
intrinsic  values  upon  which  their  securities  are 
based. 

This  discussion  relates  to  the  broader  principles 
underlying  valuation  and  certain  elements  of  value 
which  the  writer  thinks  should  be  included  therein. 

A  reading  of  the  previous  chapter  on  Capitaliza- 
tion shows  clearly,  that  the  capitalization  of  the 
modern  railroad  company  does  not  necessarily  rep- 
resent, even  remotely,  its  physical  value ;  in  fact,  it 
seldom  does  so.  The  two  extremes  in  railroad  capi- 
talization are  represented  by  those  companies  who 
have  raised  all  the  money  it  was  possible  to  borrow 
on  their  physical  property  and  franchises  on  the  one 
hand,  and  on  the  other  by  those  companies  who  have 
improved  and  extended  their  properties  with  the 
minimum  possible  issue  of  securities. 

The  New  York  Central  and  the  Pennsylvania  Rail- 
road Company  proper,  four-track  railroads  in  large 
part,  have  a  total  capitalization  of  practically  $163,- 
000  per  mile.  The  Erie,  with  its  double-track  main 
line  just  completed  between  New  York  and  Chicago, 
has  a  capitalization  of  $189,000  per  mile. 

The  Illinois  Central,  including  its  double-track 
main  line  from  Chicago  to  New  Orleans,  has  a  total 
capitalization  per  mile  of  $66,000;  the  Wabash, 
practically  single  track  throughout  its  whole  extent, 
$80,000  per  mile,  and  the  Toledo,  St.  Louis  &  West- 
ern, $108,000  per  mile. 

Many  railroads  have  expended  a  large  part  of 
their  earnings  in  improving  and  extending  their  lines 
without  capitalizing  the  cost  of  such  improvements. 
The  Pennsylvania  and  the  Burlington  are  notable  ex- 
amples in  a  long  list  of  companies  pursuing  such  a 


VALUATION  141 

policy.  It  has  been  stated  that  the  general  policy 
of  the  Pennsylvania  has  been  to  spend  a  dollar  for 
improvement  for  each  dollar  distributed  in  divi- 
dends. Whether  this  be  true  or  not,  a  large  portion 
of  its  earnings  have  gone  into  betterments  of  the 
property  without  capitalization. 

*At  the  other  extreme,  the  capitalization  of  the 
Chicago  &  Alton  was  increased  arbitrarily,  by  a 
former  management,  $33,000,000,  only  $3,000,000 
of  which  was  expended  in  actual  improvements  of 
the  property,  the  balance  representing  the  amount 
on  which  the  earnings  of  the  road  were  supposed  to 
give  a  fair  return. 

When  the  matter  of  the  justice  of  a  rate  is  under 
consideration,  there  arises  a  difficulty  in  determining 
the  value  of  a  railroad  property  from  its  earning 
capacity,  as  the  earnings  themselves  depend  directly 
on  the  rates  which  are  in  dispute.  To  establish  a 
value  of  a  property  on  such  a  basis,  for  the  purpose 
of  rate  regulation,  would  simply  be  arguing  in  a 
circle. 

As  neither  the  capitalization  nor  the  earning  ca- 
pacity may  be  used  in  determining  the  fair  value  of 
the  property  employed  in  rendering  the  service  for 
which  rates  are  charged,  other  values  must  be  ascer- 
tained to  form  a  basis  for  gaging  the  amount  upon 
which  a  fair  return  may  be  demanded. 

The  defense  of  the  railroads  heretofore,  in  resist- 
ing the  attempts  at  radical  reductions  in  rates  which 
have  been  ordered  by  various  commissions  and  other 
rate-regulating  bodies,  has  been  that  such  rates  were 
below  the  cost  of  the  service,  and  if  made  effective 

*The  statement  made  in  this  paragraph  is  based  on  public 
statements  made  at  the  time  the  matter  was  publicly  investi- 
gated. The  writer  has  no  means  of  knowing  whether  these  were 
accurate  or  not.  Many  such  statements  are  grossly  exaggerated. 
The  statement  is  used  here  merely  to  illustrate  the  fact  that  the 
capitalization  of  various  railroads  is  not  based  on  uniform  finan- 
cial methods. 


142  VALUATION  AND  RATES 

would  operate  to  confiscate  their  property.  This  at 
once  brings  up  the  question  of  what  their  property 
is  worth,  that  is,  what  is  the  value  of  the  property 
on  which  they  are  entitled  to  a  return? 

Federal  Valuation  Act* 

In  order  to  meet  this  situation,  Congress  amended 
the  "Act  to  Regulate  Commerce"  by  adding  a  new 
section  providing  for  the  valuation  of  the  property 
of  all  the  carriers  subject  to  the  provisions  of  the 
Act.  Stated  very  generally,  the  Act  directs  the  In- 
terstate Commerce  Commission  to  ascertain  various 
costs  as  to  each  piece  of  physical  property,  and  sep- 
arately, of  all  land  used  for  common  carrier  pur- 
poses; of  land  held  for  other  purposes  than  a  com- 
mon carrier;  the  financial  and  other  history  of  pres- 
ent and  preceding  corporations;  the  amount  and 
value  of  aid  granted  railroads  by  the  United  States, 
state  and  municipal  governments;  the  amount  and 
value  of  concession  in  rates  made  by  the  carriers  to 
such  governments. 

A  brief  statement  of  the  reasons  which  induced 
the  passage  of  the  Valuation  Act  will  assist  in  ob- 
taining an  understanding  of  its  principal  provisions. 

Summary  of  Commissions'  Reasons  for  Valuation 

The  grounds  upon  which  the  Interstate  Commerce 
Commission  has  based  its  demands  for  a  physical 
valuation  of  railroad  property  may  be  summarized 
as  follows: 

(1)  To  obtain  the  cost  and  value  of  railroad 
property,  franchises  and  equipment,  as  they  were  di- 
rected to  do  in  the  original  Act  to  Regulate  Com- 


*Blackface  type  are  used  in  this  chapter  to  indicate  the  em- 
phasis of  the  author  of  this  book.  This  is  to  be  remembered  in 
reading  quotations  from  other  books,  documents  or  laws. 


VALUATION  143 

merce,  which  involves  among  other  things,  the  com- 
piling of  the  corporate  history  of  the  (each)  rail- 
roads. The  cost  and  value,  when  found,  will  show 
"the  relation  existing  between  the  present  worth  of 
railroad  property  and  its  cost  to  those  who  are  the 
proprietors  of  it." 

(2)  To  establish  a  basis  upon  which  to  pass  a 
satisfactory  judgment  as  to  the  reasonableness  of 
railway  rates. 

(3)  To  establish  a  basis  for  reasonable  railway 
taxation. 

(4)  To  establish  a  proper  depreciation  reserve 
for  the  purpose  of  protecting  investors  against  deple- 
tion of  their  property  by  an  under-statement  of  the 
cost   of   maintenance,    and   to    protect   the    public 
against  unduly  high  rates  by  charging  improvements 
to  cost  of  transportation. 

(5)  To  obtain  the  correct  amount  which  is  to 
appear  as  assets  of  the  railroads  in  their  balance 
sheets,  which  must  be  known  to  determine  the  profit 
secured  to  the  investment. 

(6)  To  determine  which  roads  are  under-cap- 
italized and  which  are  over-capitalized. 

(7)  To  afford  a  means  for  the  organization  of 
railway  statistics  in  general,  "which  is  the  founda- 
tion for  all  safe  investigation." 

Railway  Securities  Commission 

The  Railway  Securities  Commission,  in  its  report 
to  the  President,  advocated  the  valuation  of  railroad 
property  and  expressed  its  views  of  the  relation 
which  would  or  should  exist  between  such  valuation 
and  the  securities  of  the  railroads. 

This  Commission  stated  that  the  valuation,  if 
properly  applied,  should  not  involve  a  reduction  of 
the  outstanding  securities  of  the  railroads,  nor  the 
prevention  of  the  issuing  of  new  securities  when  the 


144  VALUATION  AND  RATES 

amount  of  outstanding  securities  exceeded  the  phys- 
ical value  of  the  properties. 

"An  attempt  to  scale  down  old  securities  is  clearly 
out  of  the  question.  Apart  from  the  obvious  con- 
stitutional difficulties  of  such  a  course,  considerations 
of  public  expediency  themselves  forbid  it.  The  di- 
rect loss  from  the  unsettlement  of  legal  and  equit- 
able relations  would  be  very  great.  The  indirect 
loss  from  the  withdrawal  of  confidence  in  American 
railway  investments  would  be  immeasurable. 

"It  is  hardly  necessary  to  add  that  your  commis- 
sion does  not  believe  that  the  cost  of  reproduction 
of  the  physical  property  of  the  railroads,  however 
carefully  computed,  is  the  sole  element  to  be  con- 
sidered in  determining  the  present  value  of  a  rail- 
road, or  that  the  outstanding  securities  could  or 
should  be  made  to  conform  to  any  such  arbitrary 
standard." 

Senate  Committee 

The  senate  committee,  reporting  on  the  bill,  said, 
among  other  things: 

"The  committee  proposes  certain  amendments 
which  it  considers  essential  to  enable  the  commis- 
sion to  secure  every  element  of  the  value  of  the 
property  of  the  common  carriers,  so  classified  and 
analyzed  as  to  enable  the  commission  and  the  courts 
to  determine  the  fair  value  of  the  property  for  rate- 
making  purposes. 

"The  courts,  from  the  first,  have  used  various 
terms  descriptive  of  the  values  and  elements  of 
value  to  be  determined  as  a  basis  for  ascertaining 
the  fair  value  of  railway  property.  Some  of  these 
terms  they  have  altogether  rejected.  Others  have 
come  to  have  an  accepted  meaning  by  commsisions 
and  courts,  and  are  recognized  as  covering  all  the 
elements  of  value  attaching  to  the  property  of  com- 
mon carriers  for  rate-making  purposes. 


VALUATION  145 

"When  these  values  are  once  ascertained,  each 
aids  in  correcting  the  other,  and  is  given  such  weight 
as  it  is  entitled  to  in  enabling  the  commission  and 
the  courts  to  arrive  at  the  fair  value  of  the  prop- 
erty of  the  carrier  used  for  its  purposes  as  a  com- 
mon carrier.  These  terms  accepted  by  recognized 
authority  are:  (1)  The  original  cost  to  date;  (2) 
the  cost  of  reproduction  new;  (3)  cost  of  repro- 
duction less  depreciation;  (4)  other  values  and  ele- 
ments of  value,  that  is,  intangible  values." 

Senator  La  Follette,  in  presenting  the  report  of 
the  committee  to  the  Senate,  said,  among  other 
things : 

"This  bill  does  not  prescribe  the  values  that  shall 
ultimately  be  assembled  by  the  Interstate  Commerce 
Commission  in  ascertaining  the  fair  value  as  a  basis 
for  rate-making,  but  it  does  direct  the  Interstate 
Commerce  Commission  to  ascertain  every  element  of 
value  which,  under  the  decisions  of  the  courts — the 
courts  are  still  in  a  transition  period — is  now  being 
considered  as  properly  included  in  ascertaining  the 
fair  value  of  the  railroad  property  as  a  whole  in  fix- 
ing reasonable  rates." 

What  the  Act  Requires  of  the  Commission 

It  will  be  well  to  state  at  this  point,  what  the  act 
requires  the  Interstate  Commerce  Commission  to  do 
in  connection  with  the  proposed  valuation,  and  some 
other  things  which  it  does  not  require  of  it. 

The  act  requires  the  ascertainment  of  three  costs, 
viz: 

First,  what  it  has  cost  to  produce  the  railroad  as 
it  now  exists. 

Second,  what  it  would  cost,  at  the  time  of  the  val- 
uation, to  reproduce  the  railroad  new,  if  it  were  non- 
existent. 

Third,  what  it  would  cost,  at  the  time  of  the  val- 
uation, to  reproduce  the  railroad  less  the  amount  of 


146  VALUATION  AND  RATES 

depreciation  of  its  property  existing  at  the  time  of 
the  valuation.  That  is,  depreciation  must  be  defin- 
itely determined,  and  assigned  a  value  in  dollars 
and  cents. 

In  addition,  there  are  certain  elements  of  value 
which  an  inventory  of  the  physical  property  will  not 
disclose,  such  as  the  expense  of  promotion,  organiza- 
tion, engineering  and  the  value  of  the  business  as  a 
going  concern,  which  must  be  ascertained. 

The  Commission  is  specifically  directed  to  ascer- 
tain each  of  these  costs  and  values  separately,  and  to 
state  the  method  used  in  determining  them.  While 
the  methods  used  in  determining  them  are  discre- 
tionary with  the  Commission,  the  act  does  not  leave 
to  its  discretion  which  cost  or  value  is  to  be  used  for 
rate-making  or  other  purposes  for  which  the  valua- 
tion may  be  employed.  What  value  will  finally  be 
assigned  to  the  property  is  to  be  determined  after 
these  various  stipulated  costs  and  values  have  been 
ascertained. 

The  reason  for  this  has  been  shown  in  the  fore- 
going statement  of  the  discussion  of  the  bill  in  Con- 
gress, viz:  that  the  courts  have  laid  down  the  rule 
in  many  cases,  that  all  of  the  various  costs  and  val- 
ues provided  for  in  the  act  have  a  bearing  on  the 
present  value  of  the  property  and  that  the  true  value 
can  not  be  determined  except  by  giving  considera- 
tion to  all  of  them. 

Provisions   of   the    Law 

The  law  provides  for  the  valuation  of  all  railroads 
engaged  in  interstate  commerce  and  the  securing  of 
information  concerning  their  stocks,  bonds  and  other 
securities.  It  is  an  amendment,  designated  Section 
19a  of  the  Act  to  Regulate  Commerce  which  was 
approved  in  1887. 

It  provides  that  the  Commission  shall  investigate, 
ascertain  and  report  the  value  of  all  property  owned 


VALUATION  147 

or  used  by  every  railroad  engaged  in  interstate  com- 
merce, and  it  is  directed  to  make  an  inventory  which 
shall  list  the  property  of  such  railroads  in  detail  and 
show  the  several  values  provided  for  in  the  act, 
classifying  the  physical  property  as  nearly  as  prac- 
ticable in  conformity  with  the  classification  of  ex- 
penditures for  road  and  equipment  heretofore  estab- 
lished by  the  Commission. 

The  requirement  of  listing  the  property  in  detail 
necessitates  the  making  of  an  inventory  of  each  sep- 
arate piece  of  railroad  property,  such  as  the  quan- 
tities of  material  involved  in  excavating  the  cuts, 
building  the  embankments  and  the  classification  of 
such  material,  as  earth,  loose  rock  and  solid  rock; 
the  quantities  of  rails,  ties,  track  fastenings, 
switches,  ballast;  the  quantities  of  steel,  masonry 
and  yardage  and  classification  of  materials  in  bridge 
foundations ;  the  kind,  size  and  quantity  of  all  pipes, 
concrete  and  other  culverts;  the  kind  and  quantities 
of  material  in  fences,  road  crossings,  telegraph  and 
telephone  lines  of  the  railroad ;  the  signal  and  inter- 
locking plants;  buildings,  fixtures  and  grounds; 
docks  and  wharves;  tools,  machines  and  appliances 
for  performing  work,  and  every  single  piece  of  phy- 
sical property  of  the  railroad  company. 

Also  in  detail,  as  to  kind,  design  and  quantity, 
all  locomotives,  passenger,  freight  and  work  cars, 
floating  equipment,  power  plants  and  their  equip- 
ment, shops,  enginehouses,  turntables,  water  sta- 
tions, fuel  stations,  and  all  other  items  of  equipment 
and  appurtenances  relating  to  its  construction,  main- 
tenance and  renewal. 

This  inventory  is  not  to  be  made  in  "lump  sums," 
but  each  cut,  fill,  bridge,  culvert,  building,  inter- 
locker  plant,  signal,  locomotive,  car  and  transfer 
boat  must  be  listed  and  valued  separately. 

In  round  numbers,  there  are  250,000  miles  of  rail- 
road line  in  the  United  States,  and,  of  course,  many 


148  VALUATION  AND  RATES 

more  track  miles.  The  amount  of  property  to  be  val- 
ued under  this  provision  of  the  law  is  somewhere  be- 
tween ten  and  fifteen  billion  dollars.*  Ascertaining 
the  value  is  the  biggest  job  of  its  kind  ever  under- 
taken, and  the  valuation  of  all  railroad  properties 
will  hardly  be  determined  finally  within  the  coming 
ten  years. 

Of  the  three  costs  which  must  be  determined  as  to 
each  separate  piece  of  property,  the  first  is  original 
cost. 

Original  Cost 

The  idea  of  the  law  is  to  obtain  the  original  cost 
of  the  railroad  from  the  records  of  the  company. 
This  is  a  most  difficult,  in  fact,  impossible  task,  as  to 
all  of  the  railroads. 

The  old  records  of  the  Baltimore  and  Ohio  Rail- 
road were  destroyed  in  the  Baltimore  fire;  those  of 
the  Union  Pacific  Railroad  in  the  Omaha  fire;  the 
Southern  Pacific  records  in  the  fire  following  the 
San  Francisco  earthquake;  of  many  of  the  large 
systems  with  headquarters  in  Chicago,  by  the  fire  of 
1873,  and  the  same  is  true  as  to  the  original  records 
of  many  other  roads. 

In  the  combination  of  smaller  roads  into  larger 
systems,  many  records  were  lost  or  destroyed,  in 
fact  many  of  the  original  records  were  of  little  value, 
as  the  systems  of  book-keeping  were  as  numerous  as 
the  book-keepers,  prior  to  the  appointment  of  the 
Interstate  Commerce  Commission,  in  1887.  Often, 
in  such  combinations,  the  smaller  road  was  bought 
outright,  its  original  cost  being  of  no  interest  to  the 
purchasing  road. 

In  many  cases  the  actual  construction  of  the  rail- 
road was  performed  by  a  construction  company  and 
the  only  record  appearing  in  the  railroad  company's 

"This  does  not  include  the  value  of  real  estate. 


VALUATION  149 

books  is  a  statement  of  the  amount  paid  such  com- 
pany as  provided  in  the  construction  contract. 

There  was  no  uniform  system  of  construction  ac- 
counts prior  to  1908,**  and  the  construction  and 
maintenance  accounts  of  the  companies  were  seldom 
kept,  prior  to  that  time,  so  that  expenditures  could 
be  segregated  accurately. 

The  railroads  have  been  reconstructed,  not  only 
once,  but  several  times  as  to  many  of  them.  Few  of 
the  original  structures  remain.  Heavier  equipment 
demands  entirely  new  bridges,  more  substantial 
track  structures,  longer  and  heavier  turntables, 
larger  engine  houses,  and  this  has  changed  not  only 
the  size  but  the  character  of  many  structures. 

It  is  quite  likely  as  to  most  railroads,  and  as  to 
some  features  in  all  of  them,  that  the  effort  to  ob- 
tain original  cost  must  be  abandoned. 

Cost  of   Reproduction   New 

This  cost  is  determined  by  supposing  that  the  sur- 
roundings of  the  railroad  remain  as  they  are  at  the 
time  of  the  valuation,  but  that  the  right  of  way  of 
the  railroad  is  bare  and  it  is  necessary  to  reproduce 
all  of  the  structures,  equipment  and  physical  prop- 
erty of  the  company  as  it  exists  at  the  time  of  the 
valuation  on  such  bare  right  of  way. 

The  detail  of  the  assumed  condition  is  not  defi- 
nitely settled  as  yet.  It  is  a  matter  of  great  im- 
portance, as  the  assumptions  affect  the  unit  prices 
at  which  different  structures  and  material  are  to  be 
estimated  and  as  to  whether  some  items  are  to  be  in- 
cluded or  not. 

The  actual  work  of  making  the  federal  valuation 
is  under  the  immediate  supervision  of  a  Director.  In 
the  early  part  of  1915  the  Director  submitted  a  list 

**Classiflcation  of  road  and  equipment  accounts  was  not  pre- 
scribed by  the  commission  until  1908. 


150  VALUATION  AND  RATES 

of  questions  to  the  railroads,  State  Commissions  and 
others  interested  in  the  valuation,  in  order  to 
obtain  the  views  of  all  parties  in  interest  as  to  the 
basis  on  which  the  valuation  was  to  be  made,  that 
is  as  to  the  assumptions  to  be  made  in  considering 
the  cost  of  reproduction  new,  the  manner  of  deter- 
mining depreciation  and  appreciation,  what  over- 
head charges  are  to  be  allowed,  the  manner  of  de- 
termining unit  prices,  the  manner  of  estimating  cost 
of  land  and  many  other  matters  of  vital  importance 
in  determining  the  various  costs  and  values  required 
to  be  ascertained  by  the  Valuation  Act.  Some  of 
these  questions  of  the  Director's  will  be  discussed 
in  order  to  make  clear  the  more  important  factors 
which  are  involved  in  the  making  of  a  valuation  of 
railroad  property. 

Assumptions  as  to  Conditions 

Director's  Question  (1)  :  In  determining  the  "cost 
of  reproduction  new,"  to  what  extent  should  refer- 
ence be  had  to  conditions  as  they  existed  at  the  time 
of  original  construction? 

(a)/  The  road  runs  through  an  orchard  which  did 
not  exist  at  the  time  of  original  construction.  In  de- 
termining cost  of  reproduction  new,  shall  the  value 
of  the  land  be  determined  with  or  without  the  trees? 

(b)  Should  an  allowance  be  made  for  clearing 
and  grubbing  and,  if  so,  shall  it  be  allowed  where 
the  road  runs  through  what  is  now  tillage  land,  but 
what  at  the  time  of  construction  was  a  forest? 

(c)  A  building  was  wrecked  when  the  road  was 
constructed.     Is  the  expense  of  the  wrecking  to  be 
included  in  the  reproductive  cost? 

(d)  Are    present   geological    and    topographical 
conditions  to  be  taken,  or  is  inquiry  to  be  made  as 
to  what  these  conditions  were  at  the  time  of  original 
construction  ? 


VALUATION  151 

(e)  Should  it  be  assumed  that  present  transpor- 
tation facilities  are  in  effect,  or  must  reference  be 
had  to  such  facilities  as  existed  when  the  road  was 
constructed  ? 

In  considering  what  are  fair  assumptions  as  to 
the  conditions  prevailing  at  the  time  of  reproduction, 
no  inflexible  rule  can  be  made  to  apply  to  all  con- 
ditions and  circumstances.  Common  sense  in  com- 
bination with  fairness  and  flexibility  must  be  the 
essence  of  the  rules. 

The  fair  assumptions  are :  That  the  right  of  way 
of  the  railroad  is  considered  to  be,  at  the  time  of 
the  valution,  in  the  same  condition  in  which  it  was 
at  the  time  of  original  construction;  that  is,  it  was 
not  graded,  and  if  it  were  in  a  timber  country,  it 
was  covered  with  timber  which  had  to  be  cleared 
and  the  roots  grubbed  out  before  the  excavations 
could  be  made,  and  if  any  building  or  other  im- 
provement stood  on  the  right  of  way,  it  had  to  be 
paid  for,  as  well  as  the  cost  of  wrecking  and  remov- 
ing it. 

The  mere  fact  that  some  farmer  had  since  planted 
an  orchard  along  side  of  the  right  of  way  adds  no 
value  to  the  physical  property  of  the  railroad,  and 
the  railroad  company  should  not  derive  any  benefit 
from  such  a  fact,  nor  should  it  be  penalized  because 
other  farmers  happened  to  cut  all  of  the  trees  from 
the  land  on  both  sides  of  the  right  of  way  at  other 
points. 

In  so  far  as  the  condition  of  the  right  of  way  is 
concerned,  it  should  in  all  particulars,  be  considered 
as  it  existed  at  the  time  of  the  original  construction, 
geologically  and  topographically,  in  so  far  as  such 
conditions  can  be  determined.  In  some  cases  it  will 
not  be  possible  to  determine  what  all  of  the  condi- 
tions were,  accurately,  but  with  general  construction 
experience,  some  local  inquiry  and  investigation  of 
available  records  as  a  basis,  and  a  desire  for  fair- 


152  VALUATION  AND  RATES 

ness  as  a  guide,  there  is  little  chance  for  serious  er- 
roneous assumptions  as  to  original  conditions. 

That  all  transportation  facilities  are  in  effect  as 
at  the  date  of  the  valuation,  except  the  one  being 
valued,  is  the  only  practical  assumption,  all  things 
considered.  It  is  possible  to  build  a  railroad  in  al- 
most any  situation,  at  some  price,  but  it  is  not  hu- 
manly practicable  and  certainly  not  economically  so, 
to  construct  a  railroad  in  some  situations  if  no  trans- 
portation facilities  were  available  for  transporting 
certain  materials  necessary  for  its  construction. 

What  would  it  cost  to  haul  rails  from  Pittsburgh 
or  Chicago  to  a  railroad  like  the  Union  Pacific,  start- 
ing at  Omaha,  if  no  transportation  facilities  were 
available?  The  prices  at  which  rail  and  other  track 
and  bridge  material  would  have  to  be  estimated,  on 
account  of  this  haul,  would  be  ridiculous. 

Nor  is  this  all,  for  if  there  were  no  rail  transporta- 
tion, most  of  the  central  states  would  be  covered 
with  timber,  as  there  would  be  no  market  for  it,  and 
its  price  would  be  very  low;  there  would  be  a  very 
limited  market  for  grain  and  other  farm  products, 
and  in  consequence  fewer  farms;  interior  manufac- 
turing centers  of  any  considerable  size  would  not  be 
possible,  and  the  cost  of  all  manufactured  articles 
on  the  proposed  railroad  would  be  prohibitive. 

Such  assumption  as  that  no  transportation  facili- 
ties are  in  effect  do  violence  to  common  sense  and 
lead  the  mind  into  vain  and  endless  speculation. 
What  effect  such  an  assumption  would  have  on  an 
actual  valuation  would  be  difficult  to  say,  for  if  fol- 
lowed to  its  logical  conclusion  it  would  effect  many 
items  of  cost. 

All  rails  and  other  articles  of  steel  and  iron  manu- 
facture would  be  estimated  at  very  high  prices;  tim- 
ber, at  very  low  prices  in  some  situations,  very  high 
in  others ;  labor  usually  at  very  low  prices ;  practic- 
ally all  of  the  grading  would  be  estimated  on  the 


VALUATION  153 

basis  of  manual  labor,  as  the  cost  of  transporting 
heavy  machinery,  such  as  steam  shovels,  would  pro- 
hibit its  use. 

To  summarize  and  answer  this  question  directly, 
the  fair  assumption  for  general  application — and 
there  may  be  some  exceptions  to  it — the  right  of 
way  of  the  railroad  under  valuation  should  be  con- 
sidered as  being  in  the  condition  it  was  actually  in 
when  original  construction  was  undertaken,  and  that 
the  condition  as  to  the  adjoining  land,  transportation 
and  other  facilities  and  sources  of  supply,  are  those 
which  exist  at  the  time  of  the  valuation. 

Director's  Question  (2)  Should  the  road  be  re- 
produced in  the  form  and  manner  in  which  it  was 
originally  built? 

(a)  For  example,  gravel  was  brought  from  a  con- 
siderable distance  in  point  of  fact,  but  a  gravel  bank 
is  available  to-day  at  much  less  cost.    Shall  the  road 
be  allowed  the  haul  which  was  actually  made? 

(b)  The  rail  originally  was  relay.     In  determin- 
ing cost  of  reproduction  new,  should  we  apply  the 
relay  price  or  the  price  of  new  rail? 

(c)  The  rail  now  in  branch  lines  and  siding  was 
originally  laid  new  in  the  main  track  and  taken  from 
there  to  the  branch  line  or  siding.     Shall  this  be 
treated  as  new  rail  and  priced  and  depreciated  ac- 
cordingly, or  shall  it  be  treated  as  relay  rail  when 
laid? 

The  reproduction  should  be  generally  of  new 
structures  of  like  kind  as  the  existing  structures. 
There  are  some  exceptions  to  this. 

As  to  the  example  (a),  the  road  should  be  al- 
lowed the  short  haul  on  the  ballast;  to  be  consistent 
as  to  the  assumption  in  regard  to  conditions  stated 
in  the  last  paragraph  of  the  discussion  of  Question 
(1) — "sources  of  supply  are  those  which  exist  at  the 
time  of  valuation." 


154  VALUATION  AND  RATES 

The  other  examples  (b)  and  (c),  with  the  at- 
tached questions,  are  impossible  conditions.  A  relay 
rail  is  a  second  hand  rail — an  old  rail,  which  has 
been  used,  as  distinguished  from  a  new  rail.  Evi- 
dently it  is  impossible  to  determine  the  "cost  of  re- 
production new"  with  an  article  which  is  itself  "sec- 
ond hand." 

There  are  some  things  which  must  be  treated  in 
another  way,  and  the  following  circumstance  illus- 
trates a  certain  class  of  items  which  require  special 
treatment.  A  safe  in  the  ticket  office  of  a  railroad 
under  valuation  had  cost  originally  about  $2,000, 
being  an  old  safe,  but  in  good  condition  and  an- 
swering every  purpose  for  which  a  safe  was  re- 
quired. To  reproduce  in  kind  would  have  cost  prac- 
tically the  same  amount.  An  improved,  modern 
safe,  affording  the  same  security  and  with  equal 
usable  inside  space,  could  be  purchased  for  $400, 
and  that  was  the  amount  allowed  as  the  cost  of  re- 
production new. 

The  loss  in  railroad  value  was  due  to  the  advance 
in  the  art  of  safe-making  and  it  should,  as  in  any 
other  business,  be  written  off.  This  is  not  to  be  con- 
fused with  obsolesence  or  inadequacy,  which  is  an- 
other matter,  as  the  safe  under  consideration  served 
the  purpose  as  well  as  a  new  safe.  Such  deviation 
from  usual  methods,  however,  must  be  carefully  con- 
sidered. 

Three  Periods — Organization — Construction — De- 
velopment. 

Simply  making  an  inventory  of  the  many  single 
items  and  structures  found  on  the  right  of  way  and 
assigning  a  unit  price  to  each,  without  taking  into 
consideration  the  relation  they  bear  to  each  other 
and  the  cost  of  assembling  them  into  a  completed 
whole,  will  not  give  the  whole  cost  of  reproducing 
the  railroad. 


VALUATION  155 

As  shown  in  preceding  chapters,  there  are  three 
distinct  periods  that  precede  successful  operation. 
In  arriving  at  reproduction  cost,  it  must  be  assumed 
that  the  same  procedure  must  be  had  as  experience 
shows  has  been  followed  in  constructing  similar 
work  in  the  past. 

In  the  chapter  on  Promotion,  the  initiation  of 
the  enterprise  has  been  described  in  detail — the  pre- 
liminary organization,  obtaining  the  charter,  the 
making  of  the  reconnoissance,  preliminary  surveys 
and  location,  the  maps,  profiles  and  estimates  of 
cost ;  estimate  of  traffic  tributary  to  the  line ;  the 
presentation  of  the  matter  to  arrange  for  the  financ- 
ing of  the  work  and  the  options  and  tentative  agree- 
ments preceding  actual  construction. 

All  of  these  things  require  time  and  skill  of  the 
highest  order.  All  of  them  are  necessary  to  be  done, 
and  the  cost  of  doing  them  must  be  included  in  the 
cost  of  reproduction  new. 

In  the  chapter  on  "Construction  and  Reconstruc- 
tion," the  next  or  construction  period  is  described  in 
detail.  Standard  and  special  plans,  specifications, 
right  of  way  maps  and  construction  profiles  must  be 
drawn;  the  construction  forces  organized,  and  the 
work  staked  out  and  its  execution  supervised;  the 
land  not  obtained  by  purchase  condemned;  agree- 
ments for  crossing  other  railroads,  for  the  use  of 
roads,  streets  and  other  public  places  must  be  made, 
as  well  as  for  the  crossing  of  the  proposed  track  by 
private  roads  and  public  highways;  the  soliciting  of 
bids  and  finally  the  awarding  of  the  construction 
contracts. 

The  acquiring  of  the  land  and  other  rights,  as 
pointed  out,  is  a  tedious  process,  often  involving  pro- 
tracted litigation  and  much  expense  and  delay.  All 
of  these  things  must  be  considered  in  the  cost  of  re- 
production. 


156  VALUATION  AND  RATES 

After  the  construction  period  comes  the  one  of 
development.  The  forces  in  the  various  depart- 
ments must  now  be  organized  and  trained  to  main- 
tain the  track  and  structures  and  operate  the  equip- 
ment; equipment  must  be  "broken  in"  and  properly 
assigned;  errors  in  construction  must  be  corrected; 
traffic  must  be  obtained  and  experiments  of  various 
kinds,  often  expensive,  must  be  tried;  in  fact,  the 
work  of  the  whole  organization  must  be  co- 
ordinated. 

This  period  will  extend  over  several  years  under 
the  most  favorable  circumstances.  At  the  begin- 
ning the ,  earnings  from  operation  will  be  nothing 
and  gradually  increase  as  the  enterprise  develops. 
These  things  are  incident  to  the  development  of  all 
railroads,  and  their  cost  is  properly  a  part  of  the 
cost  of  reproduction  and  must  be  included  in  it. 

Overhead  Charges 

The  Interstate  Commerce  Commisson  recognizes 
this  and  provides,  through  certain  accounts  in  its 
classification  of  expenditures  for  road  and  equip- 
ment, the  following: 

Engineering. 

Earnings  and  Operating  Expenses  during  Con- 
struction. 

General  Expenditures,  which  includes:  Law  ex- 
pense, stationery  and  printing,  insurance,  taxes,  in- 
terest and  commissions,  other  expenditures. 

Director's  Question  (3)  :  What  overhead  charges 
should  be  allowed,  and  in  what  amount?  By  over- 
head charges  are  meant  items  like  engineerijig,  con- 
tingencies, interest,  taxes,  etc.  How  shall  the  time 
necessary  to  reproduce  the  property  be  determined? 

Engineering 

Overhead  charges  for  engineering  will  generally 
be  uniform,  but  there  are  certain  situations  that  re- 


VALUATION  157 

quire  special  consideration.  The  engineering  cost  is 
generally  stated  as  a  percentage  of  the  cost  of  all 
road  items,**  real  estate  and  equipment  not  being 
included. 

On  terminal  and  belt  railroads  and  as  to  the  large 
terminal  facilities  of  the  larger  systems,  the  cost  of 
engineering,  expressed  in  a  percentage  of  the  cost 
of  the  work,  is  sometimes  double  that  of  the  aver- 
age cost  of  those  portions  of  the  railroad  not  simi- 
larly situated. 

The  actual  cost  of  the  engineering  on  new  roads 
in  certain  general  classes  should  form  a  fair  basis 
for  establishing  the  proper  percentage  to  be  used 
for  estimating  reproduction  cost  for  any  given  road ; 
that  is,  different  roads  and  different  divisions  of  the 
same  road,  should  be  classified  as  mountainous, 
hilly,  rolling  prairie,  flat  prairie,  swampy,  etc.,  and 
the  actual  cost  percentage  of  engineering  should  be 
ascertained  for  such  general  types  and  applied  gen- 
erally to  similar  situations  on  all  railroads. 

If  the  variation  between  these  types  of  road  was 
found  to  be  large  it  would  be  necessary  to  classify 
all  roads  in  this  regard;  if  small,  a  general  average 
could  be  fairly  used.  The  percentage  used  should, 
however,  be  based  on  actual  cost  records  of  a  period 
as  near  the  date  of  the  valuation  as  practicable.  The 
terminal  properties  should  be  investigated  separ- 
ately. 

Contingencies 

All  valuations  should  contain  an  allowance  for 
contingencies,  to  cover  omissions,  errors  and  uncer- 
tainties. Experience  shows  that  final  cost  invaria- 
bly exceeds  estimates,  even  when  the  greatest  care 
and  skill  are  employed  in  preparing  them,  unless 

**Road  items  include  all  items  of  grading — as  cuts  fills  and 
tunnels, — bridges,  buildings,  structures  of  all  kinds  and  all  physi- 
cal improvements. 


158  VALUATION  AND  RATES 

provision  is  made  for  the  many  contingencies  aris- 
ing during  the  prosecution  of  the  work,  as  explained 
in  detail  in  the  chapter  on  Promotion. 

Study  of  a  completed  railroad,  with  complete  con- 
struction records**  eliminates  many  of  the  contin- 
gencies which  can  not  be  foreseen  in  the  case  of  an 
unconstructed  road,  but  there  are  still  large  elements 
of  uncertainty  to  be  considered,  such  as  claims,  de- 
lays, fluctuating  markets,  omissions,  uncertainties  as 
to  land  values  and  damages,  lack  of  knowledge  of 
foundations,tt  especially  on  the  older  roads  where 
complete  records  are  not  available — character  of 
material  in  tunnels,  and  many  other  items. 

Some  percentage  of  total  cost  must  be  added  to 
cover  these  elements  of  uncertainty.  The  proper 
percentage,  from  the  nature  of  things,  can  never  be 
more  than  a  guess.  It  should  probably  not  be  less 
than  5%  in  any  case,  and  not  usually  more  than  10% 
of  the  cost  of  all  items,  when  applied  to  work  al- 
ready constructed. 

Interest  During  Construction 

Payments  for  the  use  of  money  are  much  the  same 
as  payments  for  labor  or  material.  The  company 
must  have  some  fund  from  which  to  make  payments 
during  the  construction  period  and  must  pay  for  its 
use.  The  amount  to  be  allowed  is  the  interest  on  the 
total  cost  of  the  road  (exclusive  of  equipment),  for 
a  period  equaling  one-half  the  estimated  construc- 
tion period. 

**Such  records  are  seldom  available,  except  on  roads  recently 
completed,  and  even  as  to  these,  details  are  seldom  complete 
enough  for  any  great  refinement  in  estimating. 

ttSome  valuators  of  wide  experience  contend  that  the  percent- 
age to  be  added  for  contingencies  should  be  larger  in  reproduction 
estimates  than  in  the  case  of  new  construction,  on  account  of  the 
lack  of  complete  records  as  to  original  conditions — particularly  as 
to  foundation  and  tunnel  work.  There  is  much  evidence  to  sup- 
port this  contention. 


VALUATION  159 

The  allowance  for  interest  during  construction 
should  be  based  on  the  credit  of  the  company  op- 
erating the  road ;  that  is,  on  what  interest  it  actually 
has  paid  for  the  money  borrowed  in  a  period,  say  of 
ten  years,  preceding  the  valuation,  averaging  the 
interest  rate  for  the  entire  period.  This  is  the  only 
safe  basis  for  predicting  this  feature  of  reproduction 
cost. 

The  recorded  experience  of  various  railroads  for- 
bids the  adoption  of  a  general  rate  to  be  applied 
to  all  railroads  alike.  A  railroad  doing  business  in 
a  highly  developed  mining  or  manufacturing  dis- 
trict can  certainly  borrow  money  at  a  lower  rate  of 
interest  than  a  line  less  favorably  situated  as  to 
traffic  possibilities. 

The  time  necessary  to  perform  the  work  can  not 
be  determined  with  any  degree  of  refinement  or  of 
assurance  of  the  correctness  of  the  conclusion.  No 
railroad  over  11,000  miles  long,  like  the  A.,  T.  & 
St.  Fe,  for  instance,  was  ever  built  as  a  system  at  one 
time;  our  whole  experience  relates  to  piece-meal 
construction — a  few  miles  or  a  few  hundred  miles  at 
the  most,  at  one  time.  Actual  reproduction  of  such 
systems,  simultaneously  along  the  whole  line,  would 
be  practically  impossible. 

The  only  course  open  for  practical  consideration 
of  reproduction,  is  to  divide  the  system  into  units, 
the  proper  length  of  which  is  open  to  discussion. 
The  unit  of  operation  is  the  division,  which  varies 
from  about  250  miles  on  a  road  of  dense  traffic  to 
500  miles  in  some  instances  where  traffic  is  light  and 
train  service  in  consequence  infrequent,  the  average 
for  the  whole  country  being  probably  about  350 
miles. 

Except  in  cases  where  there  is  some  special  con- 
dition which  does  violence  to  the  assumption,  the 
unit  for  consideration  of  reproduction  might  well  be 
the  operating  division.  With  this  as  a  basis,  a  fair 


160  VALUATION  AND  BATES 

estimate  as  to  the  time  required  for  construction  may 
be  made,  by  considering  in  detail  the  quantity  and 
character  of  the  work  to  be  performed.  Large 
terminals,  tunnels,  difficult  bridge  foundations,  par- 
ticularly heavy  rock  cuttings,  would  of  course  re- 
quire longer  time  to  construct  than  light  rolling 
prairie  work. 

Actual    Allowances — General    Principle 

Such  items  of  general  expenditures  as  law,  sta- 
tionery, insurance  and  taxes,  may  be  obtained  from 
the  records  for  such  items  on  any  given  road,  and 
the  amount  applied  as  to  half  the  estimated  time 
of  construction,  in  considering  reproduction  cost.  A 
bankers'  commission  should  be  allowed  for  the  sale 
of  securities. 

In  the  Milwaukee  Three-Cent  Fare  Case,  Pro- 
fessor M.  E.  Cooley,  who  had  charge  of  the  valua- 
tion of  the  Michigan  railroads  for  that  state,  testified 
that  the  following  were  fair  percentages  to  be  added 
to  the  inventory  value : 

Per  Cent. 

For  Contingencies,  certain  items 5 

For  Contingencies,  general & 

For  Engineering 4 

For  Insurance  during  construction ...  y% 
For  Organization  and  legal  expense.  .  2y% 
For  Interest  during  Construction.  ...  6 

Total 23 

Authorities  do  not  agree  as  to  the  proper  per- 
centages to  be  added  for  the  items  named  above, 
but  the  values  shown  will  serve  to  indicate  that  the 
overhead  charges  form  a  very  considerable  per- 
centage of  the  total  value  under  all  circumstances. 

The  general  principle  to  be  applied  in  the  de- 
termination of  all  of  these  overhead  charges  is  that 


VALUATION  161 

a  percentage  rate  based  on  previous  experience  is 
the  safest  method  possible.  Any  other  method  in- 
volves a  large  factor  of  speculation. 

Cost  of  Reproduction  New  Less  Depreciation 

The  writer's  definition  of  the  term  depreciation,  as 
used  in  this  statement,  is:  A  lessening  in  value  for 
the  purposes  for  which  the  property  is  used. 

Before  discussing  the  requirements  of  the  Valua- 
tion Act  as  to  depreciation,  attention  is  directed  to 
the  distinction  between  the  depreciation  of  the  sim- 
ple component  parts  of  a  property  or  plant  and  de- 
preciation of  the  plant  as  a  whole. 

A  tie  or  a  rail  is  a  simple  property  and  a  com- 
ponent part  of  the  track  or  the  railroad  as  a  whole. 
The  rail  may  deteriorate  from  age  and  use  and 
such  deterioration  is  depreciation  in  the  rail  itself. 
But  if  the  rail  is  properly  maintained  at  all  times 
during  its  useful  life  and  replaced  by  another  at  the 
end  of  such  life,  the  current  depreciation  of  the  rail 
is  not  to  be  considered  as  depreciation  of  the  track 
or  the  railroad  as  a  whole. 

If  the  rail  is  not  properly  maintained  at  all  times 
and  is  not  replaced  by  another  when  it  comes  to 
the  end  of  its  useful  life,  the  railroad  as  a  whole  is 
depreciated  by  the  amount  of  the  deferred  main- 
tenance or  replacement  which  is  due. 

Failure  to  make  this  distinction  between  the 
simple  component  parts  of  a  railroad  and  the  rail- 
road as  a  whole — which  from  its  nature  has  an  in- 
definite life,  through  continuously  applied  mainte- 
nance and  replacement  of  worn  simple  parts — has 
led  many  valuators  into  the  error  of  stating  that 
the  present  value  of  the  property  is  to  be  obtained 
by  deducting  from  the  cost  of  reproduction  new  of 
the  railroad  as  a  whole,  the  current  depreciation  of 
some  of  its  simple  component  parts,  even  when 


162  VALUATION  AND  RATES 

proper  maintenance  has  been  applied  to  such  parts, 
when  and  as  often  as  needed  and  replacements  of 
worn  parts  made  when  required. 

The  only  actual  depreciation  in  the  property,  as 
a  whole,  is  the  deferred  maintenance  and  replace- 
ments— that  is  the  maintenance  or  replacements 
which  should  have  been  previously  applied,  but 
which  in  fact  were  not  applied  when  needed. 

This  subject  is  treated  in  greater  detail  in  follow- 
ing pages,  attention  being  directed  to  it  in  advance 
of  the  following  discussion  to  emphasize  the  distinc- 
tion of  the  depreciation  of  the  many  simple  proper- 
ties, which  when  placed  in  proper  relation  to  each 
other  make  a  railroad,  and  the  depreciation  in  the 
railroad  considered  as  one  whole  working  plant. 

The  law  provides  that  the  amount  of  the  deprecia- 
tion for  each  separate  part  of  railroad  property  be 
determined  definitely  and  that  such  depreciation  be 
subtracted  from  the  cost  of  reproduction  new  to  ob- 
tain the  cost  of  reproduction  less  depreciation. 

Depreciation — Appreciation 

There  are  certain  parts  of  a  railroad  that  begin  to 
depreciate  as  soon  as  they  are  installed.  The  most 
important  of  these  are  rails,  ties,  timber  structures, 
bridges,  buildings,  equipment  and  machinery.  There 
are  certain  other  items  that  appreciate  in  value  with 
age,  such  as  graduation  (excavation  and  embank- 
ments) concrete  masonry  and  ballast. 

The  Director  has  submitted  the  following  ques- 
tions in  regard  to  depreciation  and  appreciation 
which  are  discussed  in  turn : 

Director's  Question  (4) :  Shall  allowance  be 
made  for  appreciation  and  if  so  as  to  what  parts  of 
the  property?  Shall  account  be  taken  of  solidifica- 
tion and  adaptation,  and  if  so,  shall  this  be  by  addi- 
tion of  a  percentage  of  all  grading  quantities? 


VALUATION  163 

What  allowance,  if  any  shall  be  made  for  shrink 
or  swell  in  determining  quantities  as  shown  by  actual 
measurement  in  present  embankments,  and  shall  this 
allowance  be  made  by  reference  to  local  conditions 
or  by  some  uniform  per  cent? 

Appreciation — Embankment 

From  the  impact  of  operated  trains  and  from  the 
action  of  the  elements,  embankments  become  solidi- 
fied; that  is,  the  material  returns  to  the  condition 
which  it  was  in  before  being  excavated  and  moved 
into  the  embankment;  it  no  longer  shrinks  and 
washes  away,  and  it  becomes  covered  perhaps  with 
a  growth  of  vegetation  which  protects  it  from  the 
action  of  the  elements. 

There  are,  in  some  instances,  extraordinary  values 
to  be  attached  to  solidification  of  embankments. 
Roadbeds  constructed  across  a  marsh,  or  other 
swampy  areas  of  considerable  extent,  usually  have 
cost  much  more  to  maintain  in  the  fifteen  or  twenty 
years  immediately  following  construction  than  their 
original  cost. 

The  railroads  crossing  the  Kankakee  and  other 
marshes  in  northern  Illinois  and  Indiana  are  ex- 
amples of  the  type  of  construction  referred  to.  The 
roads  have  been  maintained  only  by  the  use  of  ex- 
pensive pile  retaining  walls,  cribbing,  cross-laying 
and  other  devices.  The  amount  of  material  hauled 
in  by  trains  in  the  years  succeeding  the  original  con- 
struction period  has  often  greatly  exceeded  the  quan- 
tities as  shown  by  the  original  cross-sections.  The 
work  too  has  extended  to  the  bridges  and  culvert- 
structures  under  such  embankments. 

In  the  construction  of  second  tracks  and  other  ad- 
ditional facilities,  built  many  years  after  original 
construction,  the  same  difficulties  have  been  encoun- 
tered and  are  apparent  now  on  work  but  recently 


164  VALUATION  AND  RATES 

constructed.  In  some  instances  high  railroad  em- 
bankments have  caused  the  ground  surface  on  either 
side  to  raise  as  much  as  fifteen  feet. 

An  embankment  which  has  become  stable  in  such 
a  situation  is  evidently  worth  more  (in  some  cases 
several  times  as  much)  than  a  newly  reproduced 
embankment.  In  certain  districts  there  are  large 
areas  of  marsh  or  swampy  ground,  and  appreciation 
in  the  value  of  the  embankments  due  to  solidification 
should  have  special  consideration  in  them. 

It  will  be  difficult  to  determine  the  amount  spent 
during  the  period  of  solidification  in  all  cases,  but  a 
study  of  available  data  should  be  made  in  order  that 
a  fair  general  basis  for  estimating  be  found. 

Appreciation — Excavation 

On  a  new  railroad  the  slopes  of  the  excavations 
slide,  or  the  material  washes  down  into  the  ditches, 
requiring  the  employment  of  additional  labor  and 
work  trains  in  keeping  them  clear.  After  a  period 
of  time  (eight  to  ten  years  usually)  these  slopes  be- 
come "seasoned"  by  the  elements  and  remain  stable 
and  the  cost  of  cleaning  the  ditches  in  the  excava- 
tions is  only  a  small  part  of  the  cost  during  the  sea- 
soning period.  The  additional  expense  of  mainte- 
nance in  excavations  during  the  period  of  adaptation 
seems  to  bear  a  relation  to  the  length  of  the  cuts 
rather  than  the  yardage.  In  excavations  less  than 
five  feet  this  expense  is  probably  negligable. 

Additional  allowance  should  be  made  for  the  re- 
moval of  soft  or  otherwise  unsuitable  material  which 
existed  in  the  cuts  at  the  time  of  original  construc- 
tion, and  for  cross-laying  with  timber  or  other  device 
used  which  was  essential  to  maintaining  the  opera- 
tion of  the  road  during  the  period  of  adaptation. 
Such  additional  allowance  can  not  be  made  general 
but  must  be  applied  specifically  in  any  given  situa- 
tion. 


VALUATION  165 

Embankments  and  excavations  which  have  under- 
gone seasoning  are  more  valuable  than  when  first 
constructed,  and  an  item  expressing  this  appreciation 
in  value  must  be  added  to  the  cost  of  the  reproduc- 
tion new.  It  has  been  usual  in  valuation  work  to 
allow  from  two  to  five  cents  per  yard  for  the  appreci- 
ation of  embankments,  and  from  $500  to  $1,000  per 
mile  of  excavations  over  five  feet  in  depth. 

Appreciation — Ballast 

After  tracks  are  first  ballasted,  there  is  a  consider- 
able expense  involved  in  maintaining  them  at  line 
and  surface,  due  to  the  facts  that  the  ballast  works 
into  the  roadbed  and  that  the  ties  have  not  become 
firmly  embedded  in  the  ballast.  Extra  labor  is  con- 
stantly required  to  adjust  the  track  and  additional 
ballast  to  maintain  it  at  its  proper  level. 

The  original  ballast  under  the  ties  in  an  old  road- 
bed will  generally  be  found  below  the  bottom  of  the 
second  or  subsequent  application  of  ballast  used  in 
raising  the  track  out  of  face.  Ballast  placed  on  a 
foundation  of  previously  compacted  ballasting  ma- 
terial is  more  valuable  than  ballast  placed  on  un- 
compacted  earth. 

The  measure  of  the  appreciation  is  the  value  of 
the  ballast  contained  in  an  area  say  10  feet  wide  and 
12  inches  thick  (approximately  the  area  of  the  first 
ballast),  less  the  value  of  the  embankment  which  it 
displaces.  For  example,  if  ballast  is  worth  50  cents 
per  yard  and  the  embankment  25  cents  per  yard,  the 
appreciation  is  25  cents  per  cubic  yard  of  ballast  and 
this  price  is  to  be  applied  to  10  cubic  feet  or  0.37 
cubic  yards  per  lineal  foot  of  track. 

The  allowance  for  appreciation  of  ballast  should 
not  be  made  in  rock  excavations  or  other  material 
where  the  original  ballast  could  not  have  been  forced 
down  by  the  traffic  into  the  under-lying  material. 


166  VALUATION  AND  RATES 

If  allowances  are  made  for  solidification  it  would 
seem  to  take  care  fully  of  the  swell  and  shrinkage 
of  embankments,  for  solidification  is  itself  an  adjust- 
ment or  a  return  to  its  natural  condition  of  material 
moved  from  its  original  place.  The  allowance  of 
shrink  or  swell  for  the  purpose  of  estimating  the 
cost  of  haul  is  an  unnecessary  refinement. 

Depreciation — General 

Director's  Question  (5) :  How  shall  depreciation 
be  determined? 

(a)  By  mortality  tables?     If  used,  shall  these 
be  general  or  made  with  reference  to  the  property 
of  each  carrier? 

(b)  By  actual  observation? 

(c)  By  combination  of  these  two  methods?     If 
by  combination,  what  weight  shall  be  attached  to 
age  and  what  to  observed  condition? 

(d)  Should  obsolesence  and  inadequacy  be  con- 
sidered ? 

Depreciation  should  be  determined  by  a  combina- 
of  mortality  tables — tables  showing  the  estimated 
useful  life  of  certain  structures  and  materials — by 
observation,  and  in  many  instances  the  application 
of  available  data  to  special  conditions. 

Depreciation — Ties 

General  mortality  tables  must  be  used  with  care, 
having  due  regard  to  actual  conditions.  For  instance, 
the  average  life  of  a  tie  for  the  whole  United  States 
ought  not  to  be  the  basis  of  depreciation  of  ties  on 
any  given  road. 

Certain  roads,  as  in  Missouri  and  Arkansas,  are 
located  in  territories  where  large  supplies  of  good 
white  oak  ties  are  still  available  for  their  use.  The 
life  of  these  ties  will  often  be  over  11  years  as  the 
average  for  a  whole  division.  Certain  other  roads, 


VALUATION  167 

as  in  Michigan,  use  principally  softer,  less  durable 
ties,  whose  actual  track  life  will  hardly  exceed  8 
years  in  main  line  track. 

Ties  in  a  sidetrack  may  remain  there  safely  for 
a  period  of  twelve  years,  while  ties  in  a  near-by 
main-line  must  be  removed  in  eight  years.  The  rec- 
ord of  tie  purchases  will  show  accurately  the  actual 
life  of  ties  on  any  particular  division,  and  for  each 
kind  of  service,  and  the  life  so  established  should  be 
the  basis  for  depreciation  on  that  particular  division. 

Normally,  the  removal  of  ties  will  be  the  same  for 
each  year.  To  illustrate:  if  the  records  show  the 
average  life  of  ties  to  be  ten  years  and  there  are 
3,200  ties  per  mile,  the  renewals  each  year  will  be 
320  ties.  Then  the  oldest  ties  in  the  track  will  have  a 
remaining  life  of  one  year,  and  the  newest  ties  a  life 
of  ten  years,  and  the  other  ties  a  life  varying  from 
two  to  nine  years,  the  average  for  all  being  five  and 
a  half  years.  The  average  depreciation  then  would 
be,  four  and  a  half  years,  or  forty-five  per  cent  of 
the  total  life. 

Depreciation — Rail 

Rail  has  three  distinct  values:  new,  relayer  and 
scrap.  When  new,  it  is  laid  in  the  main  line  and  re- 
mains there  until  it  becomes  worn  to  such  an  extent 
that  it  causes  "rough  riding"  for  fast  passenger 
trains,  when  it  is  removed  to  less  important  or  branch 
lines.  At  that  time  it  becomes  relayer.  When  it  is 
no  longer  suitable  for  such  service,  it  is  again  re- 
moved and  placed  in  yards  or  industrial  spurs,  where 
it  remains  until  it  is  finally  removed  and  sold  as 
scrap. 

The  rail  records  for  any  particular  section  of  track 
will  show  the  life  of  the  rail  in  each  situation,  and 
the  depreciation  can  be  readily  ascertained  on  that 
basis. 


168  VALUATION  AND  RATES 

Consideration  must  be  given  to  the  conditions  on 
the  particular  track  under  investigation.  The  rail 
in  the  main  line  will  have  a  main  line  life  of  fewer 
years  on  a  division  over  which  30  trains  are  operated 
daily  than  on  a  division  over  which  only  10  trains 
are  operated.  On  two  main  lines,  both  of  which 
have  the  same  number  of  trains,  one  being  composed 
in  greater  part  of  few  curves  and  easy  grades  and 
the  other  with  steep  grades  and  many  sharp  curves, 
the  main  line  life  of  the  rail  in  the  former  will  be 
much  longer  than  in  the  latter. 

Rail  taken  from  the  main  line  and  laid  in  a  branch 
line  track  will  not  have  a  total  life  as  great  as  if  laid 
in  a  little  used  siding.  The  depreciation  must,  in 
the  case  of  main  tracks,  on  any  division,  be  based 
on  the  record  of  actual  rail  renewals  over  a  period 
long  enough  to  show  the  average  main  line  life  of 
the  rail  on  that  division. 

The  total  life — main  line  life  plus  life  as  relayer — 
of  rail  on  any  division  can  also  be  determined  from 
the  rail  record.  The  depreciation  of  relayer  rail  will 
generally  be  based  on  observation,  the  limits  of  value 
being  set  by  a  maximum  present  value  as  that  of  re- 
layer,  and  a  minimum  of  scrap  value  plus  25  per 
cent,  the  latter  value  being  based  on  the  generally 
recognized  assumption  that  any  material  in  actual 
use  is  worth  25  per  cent  more  than  its  scrap  value. 

Supposing  a  main  line  life  of  rail,  from  the  records 
is  10  years;  its  total  life  from  the  records  30  years,* 
the  following  values  in  various  conditions  would  ob- 
tain, on  the  basis  of  a  cost  of  $30  per  ton  for  new 
rail,  $22  for  relayer  and  $12  for  scrap : 

The  wearing  value  for  main  line  service  would  be 
cost  new  $30,  less  value  as  a  relayer,  $22,  equal  $8 


*  These  values  for  life  of  rail  must  not  be  taken  as  typical  for 
rail  in  these  two  classes  of  service,  as  they  are  only  used  for  the 
purpose  of  illustration.  Life  of  rail  varies  widely  in  different 
situations. 


VALUATION  169 

or  a  depreciation  of  80  cents  per  ton,  per  year. 
After  it  had  been  in  the  track  five  years  its  depre- 
ciation would  be  $4  and  its  present  value  $26. 

To  depreciate  rail  twenty  years  old — in  a  branch 
line:  The  relayer  wearing  value  is  $10 — relay er 
value  $22  less  scrap  value  $12 — or  an  annual  de- 
preciation, on  basis  of  20  years  relayer  life,  of  fifty 
cents  per  ton.  The  total  depreciation  for  the  twenty 
year  old  branch  line  rail  would  be: 

10  years  in  main  line — depreciation  80  cents  per 
year $8 

10  years  in  branch  line — depreciation  50  cents 
per  year 5 

Total  depreciation $13 

Present  value — $30  new,  less  depreciation,  $13, 
$17. 

For  any  rail  in  use,  the  minimum  present  value 
would  be  scrap  ($12),  plus  25  per  cent  ($3),  equals 
$15  per  ton. 

Such  rates  of  depreciation  would  be  based  on  nor- 
mal maintenance.  If  observation  shows  that  it  has 
not  been  normal,  further  depreciation***  should  be 
allowed  in  some  instances,  for  the  reason  that  no  sub- 
sequent maintenance,  in  any  amount,  could  offset 
certain  damages  to  rail,  such  as  the  spreading  of 
the  head  of  the  rail  at  joints,  due  to  the  joints  being 
allowed  to  stay  "down"  for  extended  periods  through 
neglected  track  work. 

Depreciation  as  here  outlined  may  be  made  with 
some  assurance  of  practical  accuracy.  Depreciation 
on  a  basis  of  a  general  average  for  a  system,  a  state 
or  the  whole  country,  would  be  unfair,  giving  in 
some  instances  depreciation  much  too  low,  in  others 
too  high. 


***This  is  the  only  depreciation  which  affects  the  value  of  the 
investment  or  the  true  present  value. 


170  VALUATION  AND  RATES 

Depreciation — Buildings,  Structures  and  Equipment 

In  station  and  other  buildings,  the  government 
practice  and  classification  may  well  be  followed, 
which  consists  in  assigning  a  certain  life**  to  frame, 
brick  and  other  buildings  and  depreciating  them  on 
that  basis.  To  depreciate  such  structures  on  obser- 
vation alone  would  be  unreliable,  as  paint  and  small 
repairs  conceal  depreciation  not  visible,  but  which 
experience  shows  actually  exists. 

On  the  other  hand,  the  life  assigned  to  any  class 
of  buildings  is  based  on  normal  maintenance  and  if 
inspection  shows  that  the  maintenance  has  not  in 
fact  been  normal,  the  depreciation  should  be  in- 
creased. No  rigid  rule  may  be  laid  down  for  the 
allowance  to  be  made  for  lack  of  maintenance ;  it  is 
necessarily  a  matter  of  judgement  and  careful  in- 
spection, with  a  basis  of  construction  and  mainte- 
nance experience. 

In  the  case  of  such  structures  as  timber  trestles, 
their  actual  life  may  be  obtained  for  any  division 
from  its  maintenance  records,  and  a  straight  line 
depreciation  made  on  the  basis  of  such  recorded  life. 

Other  structures,  such  as  well  constructed  bridge 
piers  and  abutments,  should  be  depreciated  by  the 
amount  required  to  place  them  in  100  per  cent  con- 
dition. Often  the  only  depreciation  consists  of  the 
cost  of  re-pointing  the  joints  or  other  inconsequential 
repairs. 

On  such  items  as  equipment  and  machinery  no 
general  rule  for  appraising  depreciation  may  be 
stated ;  it  must  be  based  on  the  experience  and  judg- 
ment of  practical  men. 

**The  total  useful  life  of  such  buildings  is  to  be  determined  from 
the  maintenance  records  of  the  road  being  valued — not  on  as- 
sumed values. 


VALUATION  171 

Obsolesence  and  Inadequacy 

Obsolesence  and  inadequacy  should  be  considered 
carefully.  Where  the  structure  or  machine  does  not 
perform,  or  is  not  capable  of  performing,  any  useful 
service,  its  value  should  not  be  included  in  the  cost 
of  reproduction,  except  as  it  might  have  scrap  value. 

An  old  round-house,  used  partly  to  house  a  small 
steam  plant  and  as  a  storage  warehouse,  should  be 
estimated  on  the  basis  of  such  use.  An  old  cast-iron 
turntable  appurtenant  thereto,  but  too  short  to  turn 
any  of  the  engines  in  service,  has  no  value  other  than 
scrap.  In  some  situations  it  would  not  be  entirely 
obsolete,  but  in  the  plant  of  a  modern  railroad,  with 
large  engines,  it  is  wholly  inadequate  and  of  no  value 
as  a  turntable.  The  same  is  true  of  the  older  en- 
gines, which  are  too  light  for  either  road  or  switch- 
ing service ;  their  value  is  that  of  scrap  or  what  they 
would  bring  if  sold  for  use  in  some  other  service. 

Obsolesence  and  inadequacy  should  not  be  taken 
into  account  however  as  long  as  the  structure,  equip- 
ment, tool  or  thing  is  employed  in  beneficial  service. 

Depreciation  Not  Deductible  From  Capital 

The  purpose  for  which  the  valuation  is  made 
should  determine  whether  or  not  depreciation  should 
be  deducted  from  the  cost  of  reproduction  new.  If 
acquisition  of  the  property  is  contemplated,*  there  is 
no  question  but  that  the  depreciation  should  be  de- 
ducted, as  the  purchaser  assumes  the  burden  of  re- 
storing the  depreciated  items  to  their  condition  new. 
When  the  valuation  is  to  be  used  for  rate-making 
purposes,  however,  the  condition  is  different. 


*As  a  matter  of  fact  railroads  are  sold  on  the  basis  of  their 
value  as  transportation  facilities — not  on  the  basis  of  physical 
value.  As  a  transportation  facility,  an  old  railroad  is  more  val- 
uable than  a  new  one. 


172  VALUATION  AND  KATES 

All  practice,  and  the  law  itself  in  all  cases,  directs 
that  the  cost  of  the  repair  and  renewal  of  structures 
and  equipment  be  charged  to  operating  expense. 
The  cost  of  repair  and  renewal  is  not  to  be  considered 
as  a  shrinkage  of  capital,  or  investment,  but  as  one 
of  the  elements  of  the  cost  of  operation,  for  which 
the  rate  charged  must  provide,  in  the  same  way  as  it 
does  for  the  other  elements  of  cost  of  operation.  Be- 
ing an  operating  expense,  and  in  consequence  a  cur- 
rent liability  of  the  stockholder,  it  is  not  deductible 
from  the  capital  account  except  in  case  of  sale,  when 
the  purchaser  thereby  assumes  the  liability  of  the 
stockholder. 

Treatment  of  Depreciation 

The  reason  for  making  this  distinction  in  the  treat- 
ment of  depreciation  arises  from  the  necessity  of 
solving  certain  problems  presented  by  practical  val- 
uation. To  illustrate : 

The  agreement  for  the  use  of  Grand  Trunk  prop- 
erty, used  jointly  by  that  road  and  the  Wabash,  pro- 
vided that  the  cost  of  the  maintenance  of  the  prop- 
erty be  apportioned  between  the  two  roads.  On  ac- 
count of  this  provision  in  the  agreement,  the  Wabash 
assumed  the  liability  of  restoring  the  depreciation 
of  the  simple  component  parts  of  the  property  to 
their  condition  new  and  therefore  in  determining  the 
value  of  the  property  upon  which  it  must  pay  rental 
to  the  Grand  Trunk,  the  depreciation,  both  current 
and  deferred,  was  deducted  from  cost  of  reproduc- 
tion new. 

The  valuation  of  the  Canadian  Pacific,  in  Ontario 
— which  was  made  under  an  order  of  the  Canadian 
Railroad  Commission — was  made  for  the  purpose  of 
determining  whether  or  not  the  physical  value  of 
the  railroad  property  justified  an  issue  of  proposed 
securities.  The  depreciation  of  the  property — de- 


VALUATION  173 

preciation  of  its  simple  parts — was  not  deducted 
from  cost  of  reproduction  new.  Note  that  the  Com- 
mission was  having  the  value  of  the  property  deter- 
mined from  an  investment  standpoint. 

Railroads  which  are  in  a  bad  way  financially  are 
often  investigated  by  financial  institutions  interested 
in  their  securities.  In  determining  present  value — 
the  commercial  value  is  the  one  that  bankers  are 
interested  in — the  only  depreciation  taken  into  ac- 
count is  the  deferred  maintenance — maintenance 
and  replacements  which  should  have  been  applied 
but  which  in  fact  have  not  been  applied.  This  is  the 
only  depreciation  which  is  regarded  by  them  as 
affecting  the  commercial  value  of  the  property. 


Analogy  Between  Railroads  and  Commercial  Lines 

The  conditions  in  this  particular,  as  to  railroads, 
are  not  essentially  different  from  those  that  obtain 
in  other  lines  of  business.  The  following  illustration 
shows  that  in  commercial  lines,  as  well  as  railroads, 
the  purpose  for  which  the  valuation  is  used  deter- 
mines whether  or  not  depreciation  is  to  be  deducted 
from  cost  of  reproduction  new. 

Suppose  a  printer  starts  business  with  one  new 
press,  the  useful  life  of  which  is  ten  years  and  the 
cost  $1,000;  that  each  year,  for  ten  years,  he  buys 
a  similar  press;  in  addition,  he  is  to  maintain  a  de- 
preciation fund  to  keep  his  investment  unimpaired. 
At  the  end  of  ten  years,  he  will  have  ten  presses, 
which  have  cost  him  $10,000. 

The  following  table  shows  his  financial  status  dur- 
ing the  ten  year  period : 


174 


VALUATION  AND  RATES 


STATEMENT  OF  INVESTMENT,  DEPRECIATION 
AND  PHYSICAL  VALUE 

Total 
End 

of 
Year 

1st 

2nd 

3rd 

4th 

5th 

6th 

7th 

8th 

9th 


Number 

of 

Presses 
...1 
...2 
...3 
...4 
...5 
...6 
...7 
...8 
...9 
10th.  .10 


Total  In- 
vestment 
$1,000 
2,000 
3,000 
4,000 
5,000 
6,000 
7,000 
8,000 
9,000 
10,000 


Amount  Placed 
in  Deprecia- 
tion Fund 
$100 
200 
300 
400 
500 
600 
700 
800 
900 
1,000 


Physical 
Value  of 

Plant 

$900 

1,700 

2,400 

3,000 

3,500 

3,900 

4,200 

4,400 

4,500 

4,500 


Total  in  depreciation  fund    $5,500 


His  investment  is  now  made  up  of  $4,500  invested 
in  the  plant  and  $5,500  invested  in  a  fund  which  is 
maintained  to  keep  his  original  investment  unim- 
paired— the  two  amounts  making  a  total  of  $10,000. 
From  this  time  on,  one  of  his  presses  will  come  to 
the  end  of  its  useful  life  each  year  and  the  $1,000 
placed  in  the  depreciation  fund  each  year  will  buy 
a  new  press  to  take  its  place  and  his  plant  will  be 
maintained  on  that  basis  indefinitely. 

At  the  end  of  the  ten  years,  one  press  will  have 
come  to  the  end  of  its  useful  life  and  have  no 
value.**  The  average  depreciation  on  the  other 
nine  presses  will  be  50  per  cent  and  their  total  value 
will  therefore  be  $4,500,  if  sold  on  the  basis  of  their 
physical  condition — that  is  as  second  hand  presses. 

The  printer's  charges  for  the  work  done  by  his 
presses,  are  made  up  of  (1)  his  operating  expenses 


* 'Scrap  value  is  neglected  to  simplify  the  illustration. 


VALUATION  175 

(such  as  wages,  power,  rent,  light,  fuel,  current  re- 
pairs, etc.)  (2)  interest  on  his  investment  and  (3) 
profit  for  conducting  the  business.  In  making  his 
charges  for  work  performed,  at  the  end  of  the  ten 
year  period,  he  does  not  estimate  his  investment  in 
plant  at  $4,500,  but  at  $10,000;  if  he  based  his 
charges  on  the  first  amount  he  would  not  get  a  fair 
return  on  his  investment. 

The  rate  which  he  charges  his  customers  is  based 
on  the  $10,000  valuation.  If  he  sold  his  physical 
plant,  on  the  basis  of  its  physical  value,  he  would 
receive  $4,500  for  it  and  take  the  $5,500  fund  to 
make  his  investment  good. 

That  is,  in  case  of  sale,  the  depreciation  of  the 
property  is  deducted  from  the  cost  of  reproducing 
it  new,  but  so  long  as  he  stays  in  business,  his  sched- 
ule of  charges  is  based  on  the  cost  of  a  new  plant, 
with  no  deduction  made  for  depreciation. 

It  is  immaterial  whether  a  depreciation  reserve 
is  actually  maintained  or  not,  so  far  as  the  valuation 
upon  which  the  schedule  of  charges  is  to  be  based 
is  concerned.  The  rates  must  be  based  on  the  cost 
of  reproducing  the  plant  new,  if  there  is  to  be  a  fair 
return  on  the  value  employed. 

The  foregoing  applies  to  that  portion  of  deprecia- 
tion that  can  not  be  taken  care  of  by  constantly  ap- 
plied maintenance.  In  the  operation  of  his  presses, 
the  printer,  at  intervals  of  three  or  four  months,  must 
renew  the  rollers  which  ink  the  forms  and  replace 
many  of  the  gears  and  other  minor  parts  of  the  ma- 
chine. 

The  expenditures  for  such  repairs  he  regards  as 
much  a  part  of  operating  expense  as  pressmen's 
wages,  fuel,  light  or  any  other  current  expense.  He 
certainly  will  make  no  deduction  in  his  charges  for 
printing  because  the  rollers  on  his  press  will  need 
renewing  in  the  near  future. 


176  VALUATION  AND  RATES 

In  what  essential  particular  is  the  depreciation  of 
the  rollers  on  the  printer's  press  different  from  the 
depreciation  of  the  ties  in  a  railroad  track? 

Importance  of  Depreciation  Method 

An  idea  of  the  importance  of  the  basis  to  be  used 
in  the  treatment  of  depreciation  may  be  had  by  con- 
sidering what  effect  some  methods  of  valuation  here- 
tofore employed  by  state  commissions  would  have  on 
capitalization  or  estimated  present  value,  if  applied 
to  all  of  the  railroads  in  the  country. 

In  1912  a  valuation  of  1,187  miles  of  line**  was  re- 
ported by  the  Kansas  State  Commission.  The  depre- 
ciation on  the  whole  property  was  reported  to  be 
26.1%.  That  is  the  cost  of  reproduction  new,  less 
depreciation  was  taken  as  73.9%  of  the  cost  to  re- 
produce the  property  new  and  this  73.9%  of  repro- 
duction cost  was  stated  as  the  present  value  of  the 
property. 

If  this  rule  were  applied  to  all  of  the  railroads  in 
the  country,  assuming  their  value  to  be  the  same  as 
the  capital,  which  is  now  16  billion  dollars  in  round 
numbers,  there  would  be  a  shrinkage  in  value  of  rail- 
road property  of  over  4  billion  dollars. 

Fallacy  of  Deducting  Depreciation 

A  railroad  ten  years  old,  which  has  been  properly 
maintained,  is  physically  a  more  efficient  tool  of 
transportation  than  it  was  the  day  it  was  finished. 

A  passenger  train  that  may  be  moved  with  entire 
confidence  as  to  its  safety  at  a  speed  of  fifty  miles 
per  hour  on  the  ten-year  old  road  is  utterly  impos- 
sible on  a  new  road.  Any  given  freight  engine  can 
haul  more  tons  of  freight  in  a  train  over  the  old  road 
than  it  can  over  the  new  road,  and  do  it  in  less  time. 

**Union  Pacific  Railroad  in  the  state  of  Kansas. 


VALUATION  177 

The  new  road  will  require  more  labor  to  maintain 
it  than  the  old  road. 

That  is,  it  costs  less  to  maintain  the  structures  and 
equipment,  and  its  traffic,  both  passenger  and 
freight,  can  be  moved  by  it  at  less  cost  per  passenger 
or  per  ton  of  freight,  and  give  better  service  to  the 
public  when  it  is  ten  years  old  than  when  it  was  new. 
There  has  been  no  lessening  in  value  for  the  purpose 
for  which  the  property  is  used — carrying  passengers 
and  freight — and  hence  there  can  be  no  deprecia- 
tion. The  value  of  the  older  road,  using  the  term  in 
its  commonly  accepted  commercial  sense,  is  certainly 
greater  than  that  of  the  new  road. 

Any  method  of  depreciation  which  shrinks  the 
capitalization  of  the  older  road  below  that  of  the 
new,  or  gives  to  the  newer  road  a  greater  present 
value  than  the  older  road,  evidently  involves  a  most 
serious  error  in  the  basis  or  the  train  of  reasoning  on 
which  it  rests. 

Ruinous  Effect  on  Railroad  Credit 

If  all  capital  invested  in,  or  the  present  value  of 
railroads,  is  to  be  reduced  by  the  adoption  of  such  a 
depreciation  method  of  determining  present  value,  it 
will  be  impossible  in  the  future  to  secure  capital  for 
railroad  construction  or  betterment,  as  an  investor  is 
assured  in  advance,  that  without  regard  to  the  fact 
that  the  property  may  be  well  maintained,  and  that 
it  is  a  more  efficient  tool  of  transportation,  his  capital 
is  to  be  arbitrarily  reduced  26%  within  the  follow- 
ing few  years  on  account  of  current  deterioration  in 
the  simple  component  parts  of  the  plant.  It  is  un- 
thinkable that  the  Interstate  Commerce  Commission, 
or  the  courts,  will  ever  sanction  any  method  of  as- 
certaining present  value  which  involves  such  a  con- 
clusion. 

It  is  begging  the  question  to  say  that  establishing 
the  present  value  will  have  no  effect  on  the  legal 


178  VALUATION  AND  KATES 

capitalization.  The  general  public — the  investors  in 
railroad  securities — will  regard  the  Government  val- 
uation of  the  railroads  as  an  expression  of  their  in- 
trinsic value — the  true  commercial  worth  of  the 
property,  expressed  in  dollars  and  cents,  and  the 
amount  on  which  a  railroad  will  be  allowed  to  earn 
a  fair  return  by  the  Commissions  and  Courts,  in 
judging  rate  schedules. 

If  the  present  value  is  stated  to  be  less  than  the 
capitalization,  the  stocks  and  bonds,  which  evidence 
the  capitalization,  will  immediately  be  marked 
down  by  investors  to  the  level  of  present  value,  with- 
out regard  to  hair-splitting  distinctions  as  to  the  legal 
questions  involved  or  to  strained  definitions  of  the 
meaning  of  the  terms  depreciation,  capital  and  value. 

Reasonable  Interpretation  of  Depreciation  Clause 

The  reasonable  interpretation  of  that  portion  of 
the  Valuation  Act  which  requires  the  determination 
of  depreciation,  will  be  found  in  item  (4)*  of  the 
summary  of  the  reasons  urged  by  the  Interstate  Com- 
merce Commission,  in  its  reports  to  Congress,  for  the 
need  of  legislation  in  regard  to  railroad  valuation, 
viz:  "To  establish  a  depreciation  reserve  for  the 
purpose  of  protecting  investors  against  depletion  of 
their  property  by  an  under-statement  of  the  cost  of 
maintenance  and  to  protect  the  public  against  un- 
duly high  rates  by  charging  improvements  to  cost 
of  transportation." 

Necessity  for  Depreciation  Fund  Questionable 

Whether  or  not  a  depreciation  fund  is  the  best 
method  for  providing  for  the  maintenance  of  rail- 
road property  is  a  question  open  to  discussion.  At- 
tention is  directed  to  the  distinction  between  the 
maintenance  of  such  properties  as  those  of  a  gas  or 
water  company  or  an  urban  street  railroad — -which 

*Page  143. 


VALUATION  179 

from  the  nature  of  their  plants  may  not  be  main- 
tained by  constantly  applied  maintenance — and  that 
of  a  railroad. 

It  is  not  economical  to  repair  pipe  lines  in  detail 
— that  is  to  remove  a  pipe  here  and  there  and  re- 
place them  singly.  In  a  paved  street,  only  a  few  in- 
consequential repairs  are  made  from  time  to  time  in 
the  track  of  a  street  railway,  as  the  paved  roadway 
adjacent  to  its  tracks  must  be  maintained  for  street 
traffic.  The  maintenance  of  such  plants,  speaking 
generally,  is  applied  periodically,  in  large  amounts. 

The  maintenance  of  the  railroad  plant,  as  to  the 
most  of  it,  is  applied  constantly,  in  small  amounts — a 
tie  here,  a  new  angle  bar  on  one  side  of  a  joint  there, 
new  bolts  and  spikes  in  many  places,  as  the  economi- 
cal maintenance  of  the  track  demands. 

There  may  be  certain  parts  of  a  railroad  plant, 
such  as  buildings  and  equipment,  whose  replacement 
should  be  provided  for  by  a  depreciation  fund — that 
is  open  to  discussion — but  that  maintenance  of  the 
larger  part  of  the  railroad  plant  is  better  provided 
for  by  the  current  expenditure  for  operating  expense 
is  hardly  open  to  discussion  in  the  face  of  practical 
railroad  experience. 

Actual  Depreciation  Allowances 

In  connection  with  the  subject  of  Depreciation, 
some  allowances  which  have  been  made  in  actual 
valuations  may  be  of  interest. 

In  the  following  statement  the  depreciations  in 
Column  A  were  those  deduced  in  evaluating  a  rail- 
road with  the  following  mileage  classification : 

Miles 

Main  Single  Track 243.64 

Main  Second  Track 88.02 

Sidings 127.77 

Total  Miles  of  Track.  ,  ,  .459.43 


180  VALUATION  AND  RATES 

The  valuation  was  made  in  1913. 
In  Column  B  are  shown  the  percentages  of  depre- 
ciation used  by  the  engineers  of  the  Kansas  State 
Commission,  in  a  valuation  made  in  1912,  applying 
to  a  mileage  classified  as  follows: 

Miles 

Main  Single  Track 1,187.42 

Second  Main  Track 66.87 

Siding  and  Passing  Track 251.75 

Joint  Track. .  .41 


Total 1,506.45 

**  Depreciation  Allowances  on  Actual  Valuations 

Road  Items 

Item                                                   A  B 

1  Engineering None  None 

2  Right-of-Way   and   Station  Yard 

Grounds None  None 

3  Real  Estate None  None 

4  Grading ***  0.08% 

5  Bridges,  Trestles,  and  Culverts.  . .   9.6%  * 

6  Ties 49.8  43.32 

7  Rails ., 22.5  18.43 

8  Frogs  and  Switches 25.6  21.11 

9  Track  Fastenings  and  Other  Ma- 

terials   26.2  17.61 

10  Ballast None  15.49 

11  Track  Laying  and  Surfacing None  39.06 

12  Roadway  Tools 30.00 

13  Fencing  Right-of-Way 35.0  28.44 

14  Crossings  and  Signs 50.0  30.12 

15  Interlocking  and  other  Signal  Ap- 

paratus   29.3  8.66 


**The  depreciation  shown  in  the  table  is  the  current  deprecia- 
tion of  the  simple  component  parts  of  the  property — not  the  de- 
preciation due  to  deferred  maintenance. 

***An  allowance  was  made  for  appreciation  of  Grading. 


VALUATION  181 

16  Telegraph  and  Telephone  Lines.  .34.2         27.80 

17  Station  Buildings  and  Fixtures.  .  .28.0         31.91 

18  Shops,  Enginehouses,  and  Turn- 

tables   38.9  36.31 

19  Shop  Machinery  and  Tools 48.0  44.80 

20  Water  Stations 26.7  19.79 

21  Fuel  Stations 32.0  30.40 

22  Dock  and  Wharf  Property 43.8  

23  Miscellaneous  Structures 45.3  24.97 

All  Road  Items 12.07  27.45 

After  adding  all  overhead  charges.11.31  

*  On  Truss,  Girder,  and  I  Beams 12.98 

On  Pile  Bridges 28.69 

On  Culverts 21.68 

The  percentages  for  a  short  but  busy  independent 
coal  road  in  Southern  Illinois,  valued  in  1915,  are 
interesting.  The  main  line  mileage  was  8.93  with 
10.4  miles  of  sidings.  The  value  of  the  equipment 
was  somewhat  larger  than  the  value  of  all  items  of 
roadway  and  structures.  Appreciation  was  allowed 
on  graduation  and  offset  the  depreciation  on  other 
items  to  a  large  extent.  The  percentages  for  cur- 
rent depreciation  allowed  were  as  follows: 

On  Total  of  Roadway  Items 6.3% 

On  Equipment 26.4% 

Total  Valuation  after  adding  all 

overhead  items 16.2% 

The  small  percentage  of  depreciation  on  Roadway 
items  is  explained  by  the  facts  that  Real  Estate,  on 
which  there  is  no  depreciation,  constituted  30%  of 
the  total  of  Roadway  items  and  that  the  appreciation 
on  graduation  was  25%  of  the  total  depreciation  on 
all  other  Roadway  items. 

A  valuation,  made  in  1915,  for  a  belt  line  in  one 
of  the  larger  cities  of  the  Central  States,  having  a 


182  VALUATION  AND  RATES 

mileage  of  25.25  of  all  tracks  showed  the  following 
depreciations**: 

On  all  Roadway  Items 1.8% 

On  Equipment 9.5% 

All  items  of  Roadway,  Equipment, 

and  overhead  charges 2.0% 

The  total  value  of  the  property  was  at  the  rate 
of  $178,635  per  mile  of  track.  Real  estate  consti- 
tuted 72%  of  the  total  value  of  all  Road  items,  and 
as  there  is  no  depreciation  on  this  item  and  appre- 
ciation was  allowed  on  graduation,  the  net  deprecia- 
tion was  very  small. 

Whenever  real  estate  forms  a  larger  part  of  total 
value,  as  it  generally  will  in  terminal  and  belt  rail- 
roads, the  depreciation  will  be  much  smaller  rela- 
tively than  when  the  roadway  and  structures  are 
relatively  more  important. 

Unit   Prices 

In  connection  with  the  subject  of  Unit  Prices,  the 
Director  has  asked  the  following  questions: 

Director's  Question  6 :  "How  shall  unit  prices  be 
determined?  If  for  an  average  period,  what  shall 
the  period  be  and  shall  it  be  the  same  for  all  rail- 
roads, no  matter  as  of  what  date  they  are  valued? 

What  allowance  shall  be  made  for  the  transporta- 
tion of  men  and  materials  over  the  lines  of  the  car- 
rier itself  while  under  construction?" 

The  unit  prices  should  generally  be  based  on  an 
average  of  prices  prevailing  during  a  period  of,  say 
from  1910 — the  beginning  of  this  decade — to  Jan- 
uary, 1915,  with  a  provision  for  readjustment  at  cer- 
tain intervals,  say,  at  the  end  of  this  decade,  1920, 
if  conditions  at  that  time  demand  it. 

**Current  depreciation. 


VALUATION  183 

In  the  item  of  labor,  the  cost  has  increased  stead- 
ily for  all  classes  during  the  last  ten  years,  so  that 
it  is  certain  that  the  average  price  paid  during  the 
preceding  five  years  is  not  as  large  as  it  now  is,  or 
is  likely  to  be  during  the  next  succeeding  five  years. 
The  statistics  of  the  Interstate  Commerce  Commis- 
sion indicate  and  emphasize  this  condition. 

The  price  of  ties  and  timber,  which  form  a  large 
part  of  railroad  value,  is  greater  now  than  the  aver- 
age for  the  preceding  period  and  is  likely  to  be 
increased  very  considerably  in  the  coming  five-year 
period,  and  the  same  is  true  of  all  cars  into  whose 
construction  lumber  largely  enters.  Present  prices 
rather  than  the  average  for  the  preceding  period 
should  be  used  for  these  reasons. 

Rail  prices  have  been  practically  constant  for  some 
years;  bridge  and  structural  steel  prices  as  well  as 
the  cost  of  concrete  and  other  masonry  are  about 
the  same  now  as  the  average  for  the  preceding  pe- 
riod and  that  average  might  be  used  with  entire 
fairness. 

In  considering  this  matter,  it  must  be  recognized 
that  the  valuation  must  be  maintained  as  to  prices 
as  well  as  to  quantities,  which  the  law  recognizes 
and  provides  for.  It  will  be  physically  impossible 
to  keep  valuations  up  to  date  at  all  times,  in  this 
particular,  and  the  only  practicable  method  of  pre- 
serving their  value  is  to  provide  for  periodic  adjust- 
ments, required  by  changes  in  the  cost  of  labor  and 
material,  when  the  statistics  for  a  decade  are  avail- 
able— as  1920,  1930. 

The  statistics  of  the  Census  could  be  used  at  such 
times  and  would  be  the  basis,  in  large  part,  for  mak- 
ing the  readjustment  in  the  valuations.  The  change 
in  value  due  to  change  in  the  prices  for  the  various 
items  making  up  the  valuation,  would  for  subsequent 
periods,  be  made  by  applying  a  percentage  deter- 
mined by  consideration  of  the  effect  which  the 


184  VALUATION  AND  RATES 

changed  prices  would  have  on  the  value  of  any 
item  of  the  valuation. 

In  regard  to  the  allowance  to  be  made  for  the 
cost  of  transportation  of  men  and  material  over  the 
lines  of  the  railroad  itself,  while  under  construction, 
the  suggestion  made  in  answer  to  Director's  Ques- 
tion (3)  would,  if  adopted,  simplify  the  considera- 
tion of  this  matter.  The  suggestion  referred  to  is 
the  one  made  in  connection  with  the  question  of 
time  required  to  reproduce  the  property,  and  pro- 
vides that  usually  the  operating  division  be  taken  as 
the  unit,  it  being  clearly  impracticable  to  consider 
the  construction  of  large  systems  as  a  whole. 

If  this  suggestion  is  adopted,  the  railroad  should 
be  allowed  the  same  rates  for  transporting  men  and 
material  over  its  own  lines  to  its  nearest  division 
terminal  as  it  would  be  allowed  if  it  transported 
them  for  another  railroad  company — that  is  to  say, 
the  legal  tariff  rates. 

The  cost  of  transportation  of  material  from  such 
division  terminal  to  the  site  of  the  work  in  which  it 
is  to  be  used  would  be  at  a  construction  rate  of  say 
5  mills  per  ton-mile — the  one  heretofore  very  gen- 
erally employed. 

Land  Values 

The  Valuation  Act  provides  for  the  valuation  of 
railroad  land  as  follows : 

"Second:  Such  investigation  and  report  shall 
state  in  detail,  and  separately  from  improvements, 
the  original  cost  of  all  lands,  rights  of  way,  and  ter- 
minals owned  or  used  for  the  purposes  of  a  common 
carrier,  and  ascertained  as  of  the  time  of  dedication 
to  public  use,  and  the  present  value  of  the  same,  and 
separately  the  original  and  present  cost  of  condemna- 
tion and  damages  or  of  purchase  in  excess  of  such 
original  cost  or  present  value." 


VALUATION  185 

The  provisions  of  this  section  require  the  making 
of  an  inventory  of  each  separate  tract  or  parcel  of 
real  estate  owned  or  used  by  the  railroad  company, 
which  includes  all  land  used  for  right  of  way,  ter- 
minal purposes,  yards,  shops,  office  buildings,  etc. 
The  original  cost  of  the  land  and  its  present  value 
are  to  be  stated  separately. 

Original  Cost 

To  find  the  original  cost  of  any  land  is  easy  when 
the  consideration  named  in  the  deed  transferring  the 
land  represents  the  amount  actually  paid  for  the 
property.  Railroad  real  estate  deeds,  however,  like 
other  deeds,  often  name  only  a  nominal  amount — 
one  dollar  or  one  hundred  dollars — as  the  considera- 
tion, while  the  actual  price  paid  may  have  been 
many  thousand  dollars. 

As  to  old  transfers  of  property,  it  will  not  be 
possible  to  determine  in  all  cases  the  original  cost; 
for  transfers  made  since  the  Interstate  Commerce 
Commission's  uniform  classification  of  Construction 
accounts  has  been  in  effect  (since  1908)  the  com- 
pany's books,  in  connection  with  the  deeds  or  the 
legal  records,  will  show  the  original  cost  of  the  land. 

Present  Value 

The  present  value  of  the  property  is  a  matter 
which  will  provoke  much  discussion,  as  the  value 
of  the  real  estate  is  a  very  large  percentage  of  the 
total  value  of  railroad  property,  the  percentage  vary- 
ing with  the  method  employed  in  valuation  and  also 
with  the  density  of  the  population  of  the  territory 
traversed. 

The  present  value  of  the  land  will  generally  be 
established  on  the  basis  of  the  market  price,  as  indi- 
cated by  transfers  of  adjoining  lands  or  lands  in 
the  vicinity.  Where  no  recent  transfers  have  been 
made,  the  values  will  often  be  estimated  on  the  basis 


186  VALUATION  AND  RATES 

of  the  opinion  of  those  expert  in  real  estate  values 
in  the  particular  locality  under  consideration. 

Cost  in  Excess  of  Present  Value 

There  is  still  another  value  to  be  determined,  and 
that  is  the  original  and  present  excess  cost  to  the 
railroad  of  the  land  used  for  railroad  purposes  over 
the  market  value  of  the  land  surrounding  it  which 
is  used  for  other  purposes,  such  as  agricultural, 
commercial,  manufacturing  or  residence. 

It  is  a  matter  of  record  that  the  railroads  have 
paid  more  per  acre  or  per  square  foot  for  land  they 
have  acquired  than  the  market  price  of  land  ad- 
joining it.  The  reasons  for  this  excess  of  cost  lie  in 
the  factors  of  damage  to  abutting  property  and 
improvements  and  the  cost  of  obtaining  the  land 
through  condemnation  proceedings  in  court.  There 
are  some  other  factors  which  are  explained  in  detail 
in  the  following  pages. 

In  all  cases  in  which  the  railroad  and  the  land 
owners  can  not  agree  as  to  the  price  to  be  paid  for 
the  land  required  by  the  railroad,  such  price  and 
the  consequential  damage  to  adjoining  land  and  im- 
provements must  be  determined  by  a  jury  or  com- 
missioners appointed  by  the  court.  The  item  of 
damage  to  land  not  taken  is  the  serious  one  for  the 
railroad. 

In  condemnation  proceedings,  the  court  instructs 
the  jury  to  find  three  values:  (1)  The  market 
value  of  the  land  to  be  taken  by  the  railroad;  (2) 
The  damage  to  the  remaining  land  and  improve- 
ments of  the  land  owner,  arising  from  the  construc- 
tion and  operation  of  the  railroad;  (3)  The  bene- 
fits, if  any,  to  the  remaining  land. 

The  amount  to  be  paid  by  the  railroad  to  the  own- 
er of  the  land  is  the  market  value  of  the  land,  plus 
damage  to  adjoining  land,  plus  damage  to  improve- 


VALUATION  187 

ments,  less  any  direct  benefit  which  the  railroad  may 
confer  upon  the  land. 

If  the  railroad  right  of  way  cuts  the  remaining 
land  into  irregular  or  triangular  shaped  pieces,  the 
damage  will  be  several  times  the  value  of  the  land 
actually  taken;  if  it  necessitates  the  removal  of 
buildings  or  passes  near  them,  the  damage  to  the 
improvements  will  be  large.  The  railroad  must  pay 
the  cost  of  the  legal  proceedings  in  addition. 

Whether  the  price  paid  is  established  by  the  court 
or  by  agreement  between  the  railroad  and  the  land 
owner,  these  damages  must  be  paid.  On  this  ac- 
count, the  average  price  paid  by  railroads  in  country 
districts  is  from  two  to  three  times  the  market  value 
of  the  surrounding  land;  in  city  districts,  from  one 
and  one-fourth  to  two  and  one-half  times  such  value. 

These  are  the  costs  referred  to  in  the  act  as  the 
"original  and  present  cost  of  condemnation  and  dam- 
ages or  of  purchases  in  excess  of  such  original  cost 
or  present  value." 

Method  of  Establishing  Present  Value 

In  order  to  bring  out  a  discussion  which  will  show 
the  different  views  as  to  the  assumptions  to  be  made 
in  connection  with  ascertaining  land  values,  the  Di- 
rector has  submitted,  among  others,  the  following 
questions : 

Director's  Question  (7) :  "How  should  the  'pres- 
ent value'  of  lands  used  for  transportation  purposes 
be  determined?" 

"Should  the  cost  of  securing  the  right  of  way  at 
the  present  time  be  determined?" 

"The  act  calls  for  the  'present  cost  of  condemna- 
tion and  damages  in  excess  of  present  value  of  lands/ 
What  is  the  meaning  of  this  phrase  and  how  shall 
the  information  called  for  be  arrived  at?" 

The  term,  present  value,  as  used  in  the  act,  is 
evidently  intended  to  cover  the  present  market  value 


188  VALUATION  AND  RATES 

of  the  land  without  regard  to  its  use  for  railroad  pur- 
poses, because  a  following  clause  in  the  same  para- 
graph provides  separately  for  the  present  cost  of 
condemnation  and  damages,  or  of  purchase  in  excess 
of  such  *  *  *  present  value."  That  is,  the  act 
recognizes  the  fact  that  the  present  cost  of  acquiring 
land  for  railroad  purposes  is,  or  may  be,  greater 
than  the  present  normal  market  value  of  similar 
lands  acquired  or  used  for  other  purposes. 

The  purpose  in  requiring  both  values  arises  from 
the  fact  that  some  commissions  and  others  in  interest 
have  contended  that  certain  opinions  of  the  Supreme 
Court  in  reference  to  valuations  have  indicated  that 
the  court  does  not  approve  of  the  reproduction  meth- 
od of  ascertaining  present  value  as  applied  to  rail- 
road real  estate. 

This  matter  is  only  mentioned  here  in  explanation 
of  the  provision  of  the  act  requiring  that  these  two 
costs  or  values  be  reported  separately.  The  opinion 
of  the  court  in  question  will  be  referred  to  in  the 
following  discussion. 

With  this  view  of  the  matter,  the  present  value 
of  the  land  is  to  be  established  by  ascertaining  the 
value  of  land  adjoining  or  in  the  vicinity  of  the 
railroad  line,  which  may  be  done  on  the  basis  of 
recorded  transfers,  or  the  opinion  of  those  expert  in 
land  values  in  the  territory  under  consideration,  and 
often  by  a  combination  of  both  methods. 

The  method  of  ascertaining  present  value  by  es- 
tablishing the  ratio  existing  between  the  assessed 
value  and  the  market  value  may  be  used  as  a  check 
on  the  methods  just  mentioned,  but  should  not  be 
substituted  for  them. 

Necessity  as  to  Time  and  Location 

In  determining  the  value  of  railroad  land,  how- 
ever, it  must  ever  be  borne  in  mind  that  such  land 


VALUATION  189 

is  always  obtained  under  necessity,  both  as  to  time 
and  location,  which  tends  in  every  instance  to  in- 
crease the  price  over  the  price  of  normal  land  trans- 
actions in  which  such  necessities  do  not  appear  as 
factors. 

To  illustrate,  let  us  suppose  that  a  manufacturer 
requires  a  city  block  of  property  upon  which  to  build 
his  proposed  manufacturing  plant.  If  any  block  in 
the  city  will  serve  his  purpose,  his  land  purchase 
may  be  made  at  the  minimum  cost,  on  account  of 
the  competition  among  owners  of  suitable  property 
willing  to  sell.  If  some  necessity  demands  that  the 
city  block  be  within  a  certain  area,  say  one  mile 
square,  his  market  in  which  to  purchase  will  be  nar- 
rower, with  the  probability  that  the  price  to  be  paid 
will  be  somewhat  higher. 

If  he  is  compelled  to  buy  some  one  particular  city 
block,  he  must  purchase  at  the  sellers'  price,  as  there 
is  no  competition  among  the  owners  to  sell,  as  there 
was  in  the  first  instance  mentioned.  If  to  this  neces- 
sity, as  to  location,  we  add  the  necessity  that  the 
purchase  be  made,  say,  within  thirty  days  or  three 
months,  his  difficulties  are  multiplied  many  times. 

The  railroads  as  to  practically  all  of  their  lands 
are  compelled  to  buy  under  necessity,  both  as  to 
time  and  location. 

In  ascertaining  the  cost  of  reproduction  new,  the 
cost  of  acquiring  the  land  must  be  added  to  the 
present  value,  established  as  above.  There  are,  in 
the  case  of  all  railroads,  certain  lands  which  must 
be  condemned,  such  as  the  lands  of  minor  heirs.  In 
addition,  experience  shows  that  there  are  certain 
land  owners  with  whom  an  equitable  bargain  for 
acquiring  the  land  can  not  be  made,  and  such  land 
must  in  consequence  be  condemned. 


190  VALUATION  AND  BATES 

The  condemnation  proceedings  involve  legal  ex- 
pense, the  expense  of  expert  witnesses  and  usually 
long  delays.  All  of  these  circumstances  are  factors 
in  determining  the  cost  of  reproduction  new  and 
an  amount  should  be  added  to  the  present  value  to 
determine  the  reproduction  cost. 

Adjustment  of  Boundaries  of  Abutting  Property 

In  this  connection,  attention  is  directed  to  the  fact 
that  the  conditions  attending  the  acquirement  of 
land  when  cost  of  reproduction  new  is  to  be  ascer- 
tained, are  different  from  those  which  existed  at  the 
time  the  land  was  acquired  for  original  construction. 

At  the  time  of  original  construction,  the  existing 
boundaries  of  agricultural  lands  usually  conformed 
to  some  system  of  State  or  the  Federal  Government's 
subdivision  of  lands ;  the  existing  boundaries  of  land 
in  cities  and  towns  conformed  to  the  lines  of  the 
subdivisions  of  property  into  lots  and  blocks,  as  made 
by  the  original  owners. 

The  right  of  way  of  the  railroads  at  the  time  of 
original  construction,  in  most  instances,  could  not  be 
located  to  conform  to  the  existing  land  boundaries 
and  in  consequence  the  taking  of  a  narrow  strip  of 
land  across  an  existing  farm  or  city  block  damaged 
the  remaining  lands  of  the  owner,  as  well  as  his 
buildings  and  other  improvements. 

The  records  show  that  the  damages  were  suf- 
ficient to  make  the  cost,  per  unit  of  area — as  an  acre 
or  a  square  foot — of  railroad  land,  in  territory  out- 
side of  cities,  from  two  to  three  times,  and  in  cities, 
from  one  and  one-fourth  to  two  and  one-half  times 
the  market  value  of  adjacent  lands. 

During  the  time  between  the  original  construction 
and  the  present,  the  owners  of  the  land  abutting  on 
the  railroad  right  of  way  have  in  nearly  all  instances 


VALUATION  191 

adjusted  their  boundaries  with  reference  to  the  right 
of  way  boundaries.* 

A  reference  to  the  two  sketch  maps,**  showing 
the  conditions  at  the  time  of  original  construction 
and  the  time  of  reproduction,  will  make  this  clear.  It 
will  be  noted  from  the  sketch  showing  the  conditions 
at  the  time  of  original  construction,  that  the  lands 
of  Jones  and  Brown  were  very  seriously  damaged  by 
interposing  the  narrow  strip  of  right  of  way  across 
these  lands,  cutting  both  of  them  into  two  irregular 
shaped  parcels  where  there  had  been  but  one  before. 

The  operation  of  trains  was  a  continued  source  of 
inconvenience  and  perhaps  danger  to  the  occupants 
of  the  property  in  passing  from  one  to  the  other  of 
the  two  parcels  of  land,  which  the  right  of  way 
separates. 

It  has  usually  happened  that  after  the  railroad  has 
been  placed  in  operation,  Brown  sells  to  Jones  all 
of  his  land  on  one  side  of  the  railroad  and  Jones  sells 
to  Brown  all  of  his  land  on  the  other  side,  and  as  a 
consequence  neither  is  subjected  to  the  danger  and 
inconvenience  of  crossing  the  right  of  way.  The 
same  is  true  as  to  other  lands  shown  on  the  sketch — 
that  is,  they  will  have  very  generally  adjusted  their 
boundaries  to  the  boundaries  of  the  railroad  right  of 
way. 

The  conditions,  then,  at  the  time  of  the  reproduc- 
tion will  not  be  those  existing  at  the  time  of  the 
original  construction.  There  will  usually  be  no  sev- 
erance or  consequential  damage  to  the  land  not  tak- 
en, because  the  right  of  way  would  only  take  the 
outside  edge  of  the  parcel  or  tract  of  land  and  its 
cost,  if  condemned,  would  be  the  same  as  the  market 


"This  statement  applies  generally.  In  the  case  of  a  railroad 
under  valuation  which  had  just  beeni  completed,  the  adjustment 
of  land  boundaries  to  the  right  of  way  might  not  take  place  im- 
mediately. 

**Page  192. 


192 


VALUATION  AND  RATES 


VALUATION  193 

price**  of  abutting  land,  plus  the  cost  of  acquisi- 
tion. 

In  such  cases  as  that  of  the  land  of  Smith,  on  the 
sketch  showing  conditions  at  reproduction,  in  which 
the  land  on  both  sides  of  the  right  of  way  is  held  by 
the  same  owner,  severance  and  consequential  dam- 
age must  be  considered  at  the  time  of  reproduction 
in  the  same  manner  in  which  it  is  considered  at  the 
time  of  original  construction,  if  the  cost  of  repro- 
duction new  is  construed  in  its  literal  sense. 

Fallacies  in  Former  Land  Valuations 

In  certain  valuations  which  have  heretofore  been 
made  by  or  for  some  of  the  railroads,  the  present 
value  of  the  land  was  determined  by  another  method, 
which  failed  to  take  into  account  the  difference  in 
conditions  prevailing  at  the  time  of  reproduction  and 
of  original  construction. 

The  present  value  of  land  (cost  of  reproduction) 
in  the  valuations  referred  to,  was  obtained  by  multi- 
plying the  market  value  of  the  lands  at  the  time  of 
the  valuation  by  certain  factors.  These  factors  were 
derived  from  the  records  of  actual  cost,  which 
showed  the  relation  existing  between  the  market 
value  of  land  and  its  cost  to  the  railroads  when  ac- 
uired  for  construction  purposes. 

As  previously  stated,  land  acquired  for  construc- 
tion purposes  outside  of  cities  and  towns  has  cost 
the  railroads  as  an  average,  from  two  to  three  times 
and  within  cities  from  one  and  one-fourth  to  two 
and  one-half  times  its  normal  market  value. 

The  error  in  these  valuations  consisted  in  the  fail- 
ure to  take  into  consideration  the  adjustment  of  the 
boundaries  of  abutting  lands  to  the  right  of  way, 

**It  must  be  remembered  that  this  market  price  is  to  be  based 
on  the  purchase  being  made  under  necessity  as  to  time  and  loca- 
tion. 


194  VALUATION  AND  RATES 

which  had  been  made  during  the  period  following 
original  construction. 

In  the  Minnesota  valuations — the  ones  which  were 
used  in  connection  with  the  case  known  as  the  Min- 
nesota Rate  Case — a  second  and  additional  error  was 
made  by  assuming  a  value  of  land  for  railroad  pur- 
poses higher  than  the  market  value  of  surrounding 
land  before  multiplying  by  the  factors  mentioned 
above.  The  court  very  properly  decided  that  the 
valuation  of  real  estate  on  such  a  basis  could  not  give 
the  true  present  value  of  the  property. 

It  has  been  assumed  in  some  quarters,  from  the 
refusal  of  the  court  in  this  case  to  accept  values  de- 
rived as  just  described,  that  the  reproduction  method 
of  determining  present  value  is  not  to  be  applied  in 
valuing  railroad  real  estate. 

Had  it  been  shown  that  the  larger  cost  of  railroad 
real  estate  is  to  be  accounted  for  by  reason  of  the 
necessities  as  to  time  and  location  and  the  cost  of 
condemnation  proceedings,  and  if  the  valuation  had 
taken  into  account  the  adjustment  of  the  boundaries 
of  abutting  property — in  cases  where  such  adjust- 
ments had  been  actually  made — there  can  be  little 
doubt  that  the  court  would  have  accepted  the  prin- 
ciple of  reproduction  as  applied  to  railroad  real  es- 
tate as  it  did  when  applied  to  the  physical  property 
of  the  railroad  existing  thereon. 

Adjustment  of  Boundaries  Essential  to  Consideration 
of  Reproduction 

Failure  to  take  into  account  this  adjustment  of 
the  boundaries  of  the  abutting  property  to  the  rail- 
road property,  would  render  it  impracticable  to  con- 
sider the  cost  of  reproducing  many  existing  railroads. 
The  right  of  way  of  the  Illinois  Central  along  and 
near  the  lake  front  in  Chicago  is  an  instance  of  this 
kind. 


VALUATION  195 

It  is  not  probable  that  any  railroad  would  be  al- 
lowed at  this  time  to  obtain  a  right  of  way  and  con- 
struct such  a  railroad  through  a  district  of  the  char- 
acter which  this  railroad  traverses  in  the  city,  neither 
would  it  be  profitable  to  do  so  from  an  economical 
standpoint.  Without  considering  the  adjustment 
which  has  been  going  on  since  original  construction 
between  the  abutting  property  and  the  railroad  and 
its  operation,  consideration  of  reproduction  would  be 
entirely  impracticable. 

What  the  damage  would  be  in  the  condemnation 
of  such  property  and  of  the  riparian  right,  if  it  had 
not  become  so  adjusted,  could  only  be  a  guess  with- 
out basis  of  fact  to  support  it,  because  a  right  of  way 
for  any  considerable  distance  through  property  of 
this  character  has  never  been  condemned  in  this 
country  up  to  the  present  time. 

A  Fair  Basis  for  the  Valuation  of  Land 

Justice  Hughes  in  his  opinion  in  the  Minnesota 
Rate  Case  stated  that  if  the  railroads  were  allowed 
the  present  value  of  their  land,  as  ascertained  by  the 
value  of  adjoining  land,  they  would  have  no  cause 
for  complaint. 

This  view  fails  to  take  into  account  the  fact  that 
railroad  land  is  acquired  under  necessity  as  to  time 
and  location,  which  factors  always  tend  to  make  the 
cost  of  such  land  the  maximum.  It  does  not  take 
into  account  the  cost  of  acquisition,  as  by  condemna- 
tion and  other  expensive  methods. 

If  to  the  present  value  of  the  land,  established 
with  reference  to  the  necessity  under  which  it  must 
always  be  purchased,  and  its  cost  of  acquisition, 
there  is  added  the  original  amount  which  was  paid 
on  account  of  damage  to  land  and  improvements, 
the  railroads  would  be  placed  on  a  parity  with  other 
land  owners  as  to  its  real  estate  values. 


196  VALUATION  AND  RATES 

Valuation  of  Land  Not  Used  for  Railroad  Purposes 

The  third  paragraph  of  the  Valuation  Act  pro- 
vides as  follows: 

"Third.  Such  investigation  and  report  shall  show 
separately  the  property  held  for  purposes  other  than 
those  of  a  common  carrier,  and  the  original  and 
present  value  of  the  same,  together  with  an  analysis 
of  the  methods  of  valuation  employed." 

In  order  to  provide  for  future  tracks,  extensions  of 
yards,  terminals  and  other  facilities,  the  railroads  in 
some  instances  have  acquired  more  land  than  their 
necessities  demanded  at  the  time  of  construction.  In 
acquiring  land  it  often  costs  less  to  buy  an  entire 
tract  or  parcel  of  land  outright  than  to  take  only 
what  is  required  and  pay  damage  on  the  balance. 
Such  lands  are  usually  considered  as  held  for  com- 
mon carrier  purposes. 

There  arises  at  times  a  question  whether  certain 
lands  owned  by  a  railroad  company  may  be  reason- 
ably considered  as  held  for  common  carrier  purposes. 
The  purpose  of  this  paragraph  of  the  act  is  to  ascer- 
tain what  part  of  railroad  lands  is  not  so  held,  in 
order  that  its  value  may  not  be  included  in  the  in- 
ventory of  property  employed  for  transportation 
purposes. 

The  Director  has  asked  the  following  questions  in 
regard  to  such  lands : 

Director's  Question  (8) :  "When  are  lands  'owned 
or  used'  for  common  carrier  purposes?  Should  lands 
in  any  case  be  classified  as  held  for  common  carrier 
purposes  unless  they  are  actually  so  used?" 

Lands  are  "owned  or  used"  for  common  carrier 
purposes  when  they  are  directly  employed  in  trans- 
portation and  also  where  they  are  incidental  to  rail- 
road operation.  Land  included  within  the  right  of 
way  or  other  tracts  of  railroad  property  which  is 
used  for  such  purposes  as  storage,  grain  elevation, 


VALUATION  197 

stock  yards,  etc.,  even  when  the  improvements  there- 
on are  constructed  by  another,  is  incidental  to  rail- 
road operation  and  used  for  common  carrier  pur- 
poses. 

In  some  instances,  and  particularly  as  to  terminal 
real  estate,  it  is  good  policy  from  the  railroad  stand- 
point, and  in  the  interest  of  the  public,  that  certain 
lands  be  purchased  in  advance  of  actual  existing 
need. 

The  construction  of  terminals  is  usually  followed 
by  sharp  advances  in  the  price  of  adjoining  lands, 
and  such  lands  are  often  improved  with  very  costly 
buildings  and  other  improvements.  When  the 
growth  of  traffic  demands  the  extension  of  facilities, 
the  price  of  the  land,  and  oftener  the  price  of  the 
improvements  thereon,  has  become  so  large  that  it 
is  not  economically  possible  to  construct  urgently 
needed  extensions. 

Anticipation  of  reasonably  expected  future  re- 
quirements is  a  cardinal  principle  of  business  policy 
and  should  be  applied  on  a  railroad  as  it  is  in  other 
lines  of  business.  For  this  reason,  lands  which  are 
held  by  a  railroad,  which  it  may  reasonably  be  sup- 
posed will  be  required  within  say,  twenty-five  years 
— a  generation — should  be  included  in  the  valuation. 

It  is  needless  to  say  that  such  holdings  should  be 
subject  to  regulation,  as  some  serious  abuses  might 
grow  out  of  unregulated  holdings  of  such  property. 

Intangible   Value 

The  Valuation  Act  provides  for  ascertaining  "Oth- 
er Values  and  Elements  of  Value,"  that  is,  other 
values  than  that  of  the  physical  property.  This  evi- 
dently is  intended  to  include  not  only  the  overhead 
charges  mentioned,  but  certain  other  values  which 
are  termed  "intangible  values." 

The  term  is  used  to  classify  all  expenses  that  are 
Dreliminary  to  construction,  such  as  legal  expense  of 


198  VALUATION  AND  RATES 

organization,  cost  of  franchises  or  permits,  and  in 
addition,  the  value  of  the  property  as  a  "going  con- 
cern," of  the  "good  will,"  if  any,  of  the  business,  and 
the  cost  of  such  developments  as  have  caused  ex- 
penditure and  yet  do  not  show  in  the  inventory. 

The  first  of  these  have  already  been  considered 
under  the  head  of  overhead  expenses,  and  it  remains 
to  consider  "good  will,"  "going  concern  value"  and 
"development." 

As  a  preface  to  the  following  discussion,  it  may 
be  well  to  state  that  the  courts  have  very  generally 
decided  that  these  three  elements  have  a  value  which 
should  be  included  in  the  true  value  of  the  property, 
but  that  the  railroad  commissions  of  the  various 
states  have  usually  decided  that  nothing  is  to  be 
allowed  for  the  three  items  except  such  expenditures 
as  may  be  shown  from  the  records  were  actually 
incurred  in  developing  the  business,  and  which  do 
not  show  in  any  way  in  the  inventory  of  physical 
property. 

Good  Will 

The  term  "good  will"  has  been  defined  by  Lord 
Elden,  the  English  authority,  as  "nothing  more  than 
the  probability  that  the  old  customers  will  resort  to 
the  old  place  *  *  *  that  it  involves  an  element 
of  personal  choice  and  is  inappropriate  where  there 
can  be  no  choice  and  therefore  should  be  given  no 
value." 

English  syndicates,  in  purchasing  manufacturing 
properties  in  the  United  States,  have  often  expressed 
the  value  of  good  will  in  terms  of  net  earnings  pro- 
duced in  a  certain  number  of  years.  After  valuing 
the  physical  property,  the  value  of  the  good  will 
which  is  to  be  added  will  be  the  sum  of  the  net 
earnings  for  the  three  to  five  consecutive  years  im- 
mediately preceding  the  sale. 

It  has  been  very  generally  assumed  that,  as  to 


VALUATION  199 

the  greater  part  of  its  business,  most  railroads  enjoy 
a  monopoly.  If  this  were  true,  there  would  be  no 
"good  will"  value  in  the  business,  as  its  customers 
would  have  no  choice  of  doing  or  refusing  to  do 
business  with  it.  As  a  matter  of  fact,  this  is  far 
from  the  true  situation,  as  only  a  very  small  per- 
centage of  the  business  of  most  railroads  is  free 
from  competition. 

It  will  be  admitted  at  once,  that  on  the  bulk  of  the 
through  business  between  points  distant  from  each 
other,  there  is  usually  competition  as  to  the  whole 
or  greater  part  of  the  distance.  What  is  not  so 
evident  is  that  class  of  business  shipped  from  a  sta- 
tion served  only  by  one  road  to  a  market  which  has 
more  than  one  road  serving  it. 

While  the  shipment  may  be  non-competitive  in 
the  sense  that  the  shipper  has  no  choice  of  roads, 
the  commodity  itself  comes  into  competition  with 
like  commodity  hauled  by  other  roads  into  the  same 
market.  In  consequence,  the  business  is  competitive 
in  spite  of  the  fact  that  the  shipper  has  no  choice,  for 
the  road  must  make  such  rates  and  give  such  service 
that  he  may  compete  with  other  shippers  located  on 
other  roads. 

While  the  shipper  has  no  choice  of  roads,  he  has 
the  option  of  going  into  the  business  or  staying  out 
of  it,  and  his  decision  is  based  on  the  rates  and 
services  of  the  road  and  therefore  there  is  an  ele- 
ment of  good  will  in  that  class  of  traffic.  The  fol- 
lowing will  serve  to  illustrate  this  principle : 

The  Chicago  &  Eastern  Illinois  Railroad  serves  the 
coal  mines  in  the  Brazil  district  of  northern  Indiana ; 
the  C.,  C.,  C.  &  St.  L.  Railroad  serves  the  coal  mines 
in  southern  Illinois.  The  principal  market  for  the 
mines  of  both  districts  is  Chicago.  The  mines  lo- 
cated on  the  C.  &  E.  I.  Railroad  have  only  that  road 
to  ship  over  in  reaching  their  market,  and  the  same 


200  VALUATION  AND  RATES 

is  true  as  to  mines  on  the  C.,  C.,  C.  &  St.  L.  Railroad. 
However,  if  the  C.,  C.,  C.  &  St.  L.  Railroad  does  not 
make  a  rate  for  carrying  coal  to  Chicago  low  enough 
to  place  the  product  of  the  mines  on  its  line  on  a 
parity  in  the  Chicago  market  with  the  product  of 
the  mines  located  on  the  C.  &  E.  I.  it  gets  no  business 
at  all. 

In  other  words,  in  carrying  coal  to  Chicago  it  com- 
petes with  the  C.  &  E.  I.  Railroad,  in  spite  of  the 
fact  that  neither  of  the  shippers  has  a  choice  of  rail- 
roads over  which  to  ship,  but  each  coal  operator  has 
the  option  of  choosing  on  which  road  he  will  locate, 
or  of  deciding  whether  or  not  his  coal  will  be  mined 
and  shipped,  and  his  decision  will  be  based  on  the 
respective  rates  and  service  available  from  each  com- 
pany. 

It  may  be  stated,  therefore,  as  a  general  proposi- 
tion, that  except  as  to  that  small  percentage  of  ship- 
ments moving  between  local  stations  on  a  railroad, 
the  entire  business  of  the  railroads  is  competitive, 
and  for  this  reason  they  are  entitled,  when  the  actual 
conditions  warrant  it,  to  a  value  for  the  good  will 
of  their  business,  in  the  same  manner  and  to  the 
same  extent  that  any  mercantile  business  is. 

Going  Value 

The  following  definitions,  both  legal  and  other- 
wise, of  the  term,  "going  value,"  or  "going  concern 
value,"  are  quoted  to  convey  the  idea  that  this  term 
implies: 

"The  sum  (going  concern  value)  we  understand 
to  be  an  expression  of  the  added  value  of  the  plant 
as  a  whole  over  the  sum  of  its  component  parts, 
which  is  attached  to  it  because  it  is  in  active  and 
successful  operation  and  earning  a  return."  (Justice 
Moody,  in  the  Knoxville  Water  Company  Case.) 

"It  is  the  value  such  a  plant  has  over  and  above 
its  physical  value,  due  to  the  fact  that  it  is  not  a 


VALUATION  201 

bare  and  idle  system,  but  it  is  in  actual  operation, 
doing  business  with  a  large  number  of  customers. 
It  is  something  like  the  good  will  of  a  business,  but 
it  is  even  more  tangible."  (The  late  William  H. 
Bryan,  Consulting  Engineer.) 

"The  city  steps  into  the  possession  of  a  property 
which  not  only  has  the  ability  to  earn,  but  is,  in  fact, 
earning.  It  should  pay,  therefore,  not  merely  the 
value  of  a  system  which  might  be  made  to  earn,  but 
that  of  a  system  which  does  earn."  (Justice  Brewer 
in  Kansas  City  Waterworks  Case,  62  U.  S.  Fed.  Rep. 
853.) 

"The  value  of  the  structure  is  enhanced  by  the 
fact  that  it  is  being  used  in,  and  in  fact  is  essential 
to,  a  going  concern  business.  We  speak  sometimes 
of  a  going  concern  value  as  if  it  is  or  could  be  sepa- 
rate and  distinct  from  structure  value — so  much  for 
structure  and  so  much  for  going  concern.  But  this 
is  not  an  accurate  statement.  The  going  concern 
part  of  it  has  no  existence  except  as  a  characteristic 
of  the  structure.  If  no  structure,  no  going  concern. 
If  a  structure  in  use,  it  is  a  structure  whose  value  is 
affected  by  the  fact  that  it  is  in  use.  There  is  only 
one  value.  It  is  the  value  of  the  structure  as  being 
used.  That  is  all  there  is  of  it."  (Judge  Sav- 
age, in  Brunswick  and  Topham  Water  Districts  vs. 
Maine  Water  Company.) 

The  following  decision  of  the  Wisconsin  Railroad 
Commission,  in  the  case  of  Payne  and  others  of 
Marinette  against  the  Wisconsin  Telephone  Com- 
pany, illustrates  a  rather  different  phase  of  this  value 
than  those  just  quoted. 

The  losses  incurred  during  the  first  years  of  oper- 
ation may  be  considered  either  as  the  cost  of  estab- 
lishing a  going  business  or  a  development  expense. 
The  distinction  between  these  two  elements  is  not 
always  clear.  It  is  given  here  as  illustrating  the  fact 


202  VALUATION  AND  RATES 

that  some  rate-regulating  commissions  have  recog- 
nized the  justice  of  allowing  for  the  cost  of  estab- 
lishing public  utility  corporations  on  a  paying  basis ; 
that  is,  giving  them  a  value  as  a  going  concern : 

"If  property  is  devoted  to  the  public  use  and  rea- 
sonable care  has  been  exercised  in  all  the  phases 
of  its  management,  but  the  owners  have  not  yet 
received  a  fair  return  during  the  earlier  years  of  the 
operation  of  the  plant  in  which  the  property  is  used 
for  the  convenience  of  the  public,  the  deficits  thus 
incurred  must  be  made  up  out  of  later  earnings,  in 
so  far  as  that  is  commercially  possible  and  expedi- 
ent. *  *  * 

"The  Commission  holds  that  the  actual  wise  ex- 
penditure of  money  toward  getting  the  business  of 
the  plant  established  may  be  included  in  the  value 
to  be  allowed  for  the  purpose  of  fixing  rates." 

Most  of  the  decisions  and  opinions  just  given  relate 
to  cases  in  which  municipalities  or  districts  have  con- 
demned waterworks,  owned  by  private  corporations, 
which  it  was  desired  to  bring  under  public  owner- 
ship, and  to  telephone  systems.  The  nature  of  the 
business  of  supplying  water  and  telephones  is  more 
nearly  monopolistic  certainly  than  the  business  of 
transportation,  as  has  been  shown  in  the  previous 
discussion. 

In  view  of  the  decisions  of  the  United  States  Su- 
preme Court,  of  the  highest  State  courts  and  the 
opinion  of  eminent  engineers,  and  in  one  case,  at 
least,  of  a  State  Commission,  it  is  difficult  to  escape 
the  conclusion  that  railroads  should  be  allowed  a 
going  concern  value  when  their  properties  are  to  be 
evaluated.  If  the  valuation  is  to  be  made  the  basis 
for  purchase,  there  can  be  no  question  of  the  justice 
of  such  an  addition  to  physical  value,  nor  does  it 
seem  unreasonable  in  a  valuation  made  as  a  basis 
for  fixing  rates. 


VALUATION  203 

To  include  only  the  physical  property  and  the 
overhead  charges  heretofore  mentioned  in  making 
the  valuation,  omitting  the  commercial  value  of  the 
system,  leads  to  illogical  conclusions  when  applied 
to  the  various  railroad  systems  of  the  country  as  they 
actually  exist.  To  illustrate  the  point:  Consider 
two  trunk  lines  extending  from  Chicago  to  New  York 
— the  Erie  and  the  New  York  Central. 

The  Erie  Railroad  through  southern  New  York, 
northwestern  Pennsylvania  and  northern  Ohio,  cross- 
es some  very  rough  country  topographically,  involv- 
ing large  expenditures  for  grading  the  roadbed  and 
some  sharp  curvature  and  heavy  grades  in  overcom- 
ing the  divides  which  it  crosses. 

The  New  York  Central  follows  the  valleys  of  the 
Hudson  and  Mohawk  rivers  practically  to  the  shores 
of  Lake  Erie,  whence  it  traverses  the  flat  level  lake 
plains  into  northern  Ohio.  As  to  the  greater  part  of 
the  distance,  the  cost  for  grading  its  roadbed  has 
been  small,  its  grades  are  light,  and  except  as  to  a 
portion  of  the  line  along  the  Hudson  river,  there  is 
little  curvature.  Its  distance  between  the  termini 
is  twenty  miles  less  than  that  of  the  Erie.  It  has 
on  its  main  line  such  cities  as  Albany,  Utica,  Syra- 
cuse, Rochester,  Buffalo,  Cleveland  and  Toledo, 
which  the  Erie  reaches  only  over  branch  or  connect- 
ing lines  or  not  at  all. 

The  cost  of  reproducing  the  Erie  (track  for  track) 
will  be  very  much  larger  than  the  cost  of  reproduc- 
ing the  New  York  Central,  if  only  the  physical 
property  and  overhead  charges  are  included  in  the 
valuation.  To  say  that  it  has  equal  value  consid- 
ered from  a  commercial  standpoint  is  ridiculous. 

The  real  difference  in  value,  from  a  commercial 
standpoint,  is  made  up  of  the  larger  going  value  of 
the  New  York  Central,  which  is  based  largely  on 
good  service,  favorable  topography  and  strategical 
position.  Establishing  the  value  simply  on  the  basis 


204  VALUATION  AND  KATES 

of  the  component  physical  parts  of  a  railroad  is  evi- 
dently illogical,  whether  the  valuation  is  to  be  the 
basis  for  purchase  or  rate-making. 

Early  Deficits  an  Element  of  Going  Value 

The  cost  of  establishing  a  railroad  on  a  paying 
basis  may  be  considered  either  as  an  element  of  the 
cost  of  going  value  or  as  a  development  expense.  It 
is  treated  here  as  one  of  the  elements  of  going  value. 

Immediately  after  a  railroad  is  constructed,  its 
earnings  are  practically  nothing  at  all.  Under  very 
favorable  circumstances  it  may  earn  its  operating 
expenses  and  fixed  charges  in  three  or  four  years. 
Experience  shows,  however,  that  ordinarily  a  much 
longer  period  of  time  is  required.  The  greater  part 
of  the  railroads  of  the  country — as  to  mileage — have 
gone  into  the  hands  of  a  receiver  within  the  ten- 
year  period  following  their  completion.  On  the 
larger  systems,  with  a  large  mileage  in  successful 
operation,  extensions  have  been  made  which  did  not 
get  into  court,  but  their  operation  usually  entailed 
a  loss  for  the  parent  system  during  their  earlier 
history. 

Stated  in  another  way,  the  cost  of  placing  most 
of  the  railroads  on  a  paying  basis  has  been  deficits 
in  receipts  as  compared  with  expenses  and  charges 
and  the  lack  of  profit  during  a  considerable  period 
of  their  earlier  operation.  A  railroad,  therefore, 
which  is  able  to  pay  its  expenses,  charges  and  a 
profit  is  a  more  valuable  property  than  is  repre- 
sented by  the  reproduction  cost  of  its  physical  com- 
ponent parts,  and  the  measure  of  such  increased 
value  is  certainly  as  great  as  its  cost. 

In  consequence,  to  the  value  of  the  reproduction 
cost,  with  overhead  charges  included,  there  should 
be  added  the  deficits  of  the  early  years  of  operation 
and  a  fair  profit  for  such  operation.  This  is  as 


VALUATION  205 

much  a  part  of  the  cost  of  producing  a  going  rail- 
road as  labor,  material,  use  of  money,  or  any  other 
element  of  value  which  has  found  its  way  into  the 
working  whole. 

Development  Cost 

As  used  in  this  discussion,  development  expenses 
are  intended  to  cover  that  class  of  expenditures 
which  were  necessary  in  bringing  the  railroad  to  its 
present  state  of  efficiency,  but  the  physical  property 
for  which  the  expenditure  was  made  does  not  ap- 
pear in  the  inventory  of  the  property  as  it  is  operated 
at  the  present  time. 

In  the  chapter  on  "Construction  and  Re-Construc- 
tion," the  manner  in  which  railroads  have  been  first 
constructed  and  the  necessity  for  their  re-construc- 
tion later  has  been  explained  in  detail.  It  is  the 
general  impression  of  the  public,  and  of  many  rail- 
road men,  that  the  re-construction  of  the  railroads 
has  been  necessitated  by  errors  made  in  locating  the 
original  line,  or  in  constructing  it.  Nothing  could 
be  further  from  the  truth. 

The  original  locations  were  based  on  financial 
necessity  and  the  undeveloped  condition  of  the  coun- 
try traversed;  the  temporary  original  construction 
was  necessitated  by  the  excessive  cost  of  permanent 
work  in  districts  without  transportation — with  finan- 
cial necessity  added.  As  stated  in  the  chapter  re- 
ferred to,  it  was  oftener  a  question  of  whether  the 
railroad  could  be  constructed  at  all  rather  than  as 
to  what  kind  of  railroad  was  to  be  constructed.  The 
stiff  grades  and  sharp  curvature  employed  on  the 
original  roads  were  necessities,  not  mistakes,  and 
their  employment  indicated  skill  and  sound  business 
judgment  on  the  part  of  the  engineers. 

Had  the  railroads  been  first  constructed  to  the 
present-day  standards  as  to  grades,  curvature  and 


206  VALUATION  AND  RATES 

character  of  structures,  only  a  very  small  part  of 
the  present  extensive  system  of  railroads  could  have 
been  constructed  or,  if  constructed,  operated  except 
at  enormous  losses.  The  meager  available  capital 
and  the  certainty  of  limited  traffic  during  the  period 
following  construction  would  have  forbidden  it. 

The  economics  of  operation  for  an  increased  traffic 
density  necessitated  the  re-construction  of  the  rail- 
roads, and  in  such  re-construction  much  of  the  orig- 
inal construction  had  to  be  abandoned.  Remember- 
ing that  the  original  line  was  absolutely  essential  in 
producing  the  business  which  the  reconstructed  line 
carries  at  the  present  time,  a  part  of  its  cost  is  prop- 
erly a  part  of  the  cost  of  the  line  as  it  now  exists, 
although  no  item  would  appear  in  an  inventory  of 
the  present  line  to  cover  it. 

Permanent  Structures  Only  to  Be  Included 

There  are  certain  items  of  the  cost  of  the  original 
line  which  cannot  properly  be  included — namely, 
those  items  which  are  in  constant  course  of  renewal, 
the  cost  of  which  renewal  is  included  in  operating 
expenses — but  those  items  which  are  capital  charges, 
not  subject  to  renewal  at  operating  expense,  may 
properly  be  included  in  the  estimate  for  cost  of  de- 
velopment due  to  abandoned  lines. 

The  rails  and  steel  bridge  superstructure  on  aban- 
doned lines  may  be  removed  and  used  in  other  situ- 
ations or  sold  for  scrap;  the  ties,  timber  bridges, 
frame  station  and  other  buildings,  fences,  etc.,  are 
temporary  structures  and  things  with  comparatively 
short  life,  renewable  from  operating  expense. 

No  structure  or  thing  of  this  character  should  be 
included  in  the  estimate  of  development  expense, 
but  excavations  and  embankments,  masonry  bridge 
piers  and  culverts,  culvert  pipes  of  tile  or  iron,  and 
all  other  permanent  structures,  not  removable  from 


VALUATION  207 

an  abandoned  line,  should  be  included  in  this  esti- 
mate. 

Other  Provisions  of  the  Act 

The  fourth  paragraph  of  the  Valuation  Act  pro- 
vides for  an  investigation  and  report  upon  the  his- 
tory and  organization  of  present  and  previous  cor- 
porations operating  the  railroad  property. 

The  fifth  paragraph  of  the  act  provides  for  a  re- 
port of  the  amount  and  value  of  any  gift  or  grant 
of  right  of  way,  or  donation  made  to  the  railroads 
by  the  United  States  or  other  Government  (State, 
County  or  Municipal) ,  or  by  individuals  or  corpora- 
tions ;  also  the  grants  of  land  to  them  by  the  United 
States  or  other  Governments,  and  the  amount  of 
money  derived  from  the  sale  of  such  grants  and 
the  value  of  the  unsold  portion  at  the  time  acquired 
and  the  present  time;  also  the  amount  and  value 
of  concessions  and  allowances  made  by  the  railroads 
to  the  United  States  or  other  Governments,  in  con- 
sideration of  such  aid,  gifts,  grants  or  donations. 

During  the  earlier  periods  of  railroad  construc- 
tion, the  Federal  Government,  and  some  of  the  states, 
made  very  extensive  grants  of  unoccupied  and  other 
lands,  to  encourage  the  building  of  railroads  into 
undeveloped  territories,  particularly  west  of  the 
Mississippi  River. 

In  some  instances  the  railroad  was  given  each 
alternate  section  of  land  (a  section  of  land  is  one 
mile  square  and  contains  640  acres  of  land)  for  a 
certain  distance  on  each  side  of  its  line.  The  rail- 
roads have  sold  a  part  of  the  land  so  granted  and 
retain  some  of  it. 

A  portion  of  these  lands  have  become  valuable 
through  the  subsequent  discovery  of  coal  or  other 
mineral  under  them,  or  through  the  increased  value 
of  timber  on  such  lands. 


208  VALUATION  AND  RATES 

This  paragraph  of  the  law  provides  for  a  state- 
ment of  all  lands  granted  the  railroads  and  an  in- 
ventory of  such  land  still  held  by  them,  together 
with  the  value  of  such  land  at  the  time  it  was 
granted  and  the  present  time. 

It  also  provides  for  a  statement  of  the  value  of 
the  concessions  in  reduced  rates  and  free  transporta- 
tion made  by  the  railroads  to  these  governments  on 
account  of  their  grants  of  land  and  other  aid. 

The  purpose  of  these  two  statements  and  reports 
is  evidently  to  compare  the  value  of  the  grants  made 
by  the  governments  with  the  value  of  the  rate  con- 
cessions made  by  the  railroads. 

The  act  provides  that  the  Interstate  Commerce 
Commission  shall  prescribe  the  procedure  and  the 
form  and  classification  of  the  items  of  the  valua- 
tion; requires  the  railroads  to  furnish  any  data  re- 
quired by  the  Commission ;  provides  for  the  mainte- 
nance of  the  valuation  after  it  has  been  made  and 
for  a  hearing  of  protests  by  interested  parties  of 
any  valuation  made  under  the  supervision  of  the 
Commission. 

Conclusions 

Based  on  the  discussions  contained  in  this  chapter, 
the  following  are  fair  conclusions  as  to  the  items 
which  are  to  be  included  and  the  methods  to  be 
employed  in  evaluating  railroad  property: 

(1)  That  as  to  all  physical  structures — such  as 
track,  buildings  of  all  kinds,  water  and  fuel  stations, 
fences,    excavations,   embankments  and   all  rolling 
stock — engines  and  cars — machinery,  tools  and  all 
equipment  of  any  kind  essential  to  the  operation  and 
maintenance  of  the  railroad,  the  cost  of  reproduction 
new  is  the  fair  value  of  the  physical  property  at  the 
time  of  valuation. 

(2)  That  deterioration  in  a  simple  component 
part  of  a  railroad  is  depreciation  in  that  particular 


VALUATION  209 

part,  but  is  not,  necessarily,  depreciation  in  the  prop- 
erty or  plant  as  a  whole. 

If  the  simple  parts  of  a  railroad  are  maintained  at 
the  standard  required  for  economical  operation  and 
worn  parts  are  replaced  when  they  have  come  to  the 
end  of  their  useful  life,  there  is  no  depreciation  of 
the  railroad  as  a  whole. 

If  proper  maintenance  is  not  applied  to  the  simple 
parts  of  a  railroad  and  replacement  of  worn  parts 
made  when  due,  there  is  depreciation  in  the  property 
as  a  whole,  and  the  cost  of  making  good  the  deferred 
maintenance  and  applying  the  replacements  due  is 
the  measure  of  the  depreciation  in  the  railroad  as  a 
whole. 

(3)  The  cost  of  maintaining  and  replacing  the 
simple  component  parts  of  a  railroad  is  a  part  of 
the  current  expense  of  operating  it,  and  has  no  con- 
nection with  the  capital  account  or  the  present  true 
value  of  the  property,  so  long  as  the  railroad  as  a 
whole  is  properly  maintained  for  economical  oper- 
ation. 

In  consequence,  if  the  cost  of  restoring  that  por- 
tion of  depreciation  which  is  properly  to  be  over- 
come by  expenditure  for  operating  expense  is  de- 
ducted from  the  capital  or  the  present  true  value  of 
the  railroad,  such  deduction  confiscates  the  property 
of  its  owner  if  such  alleged  true  value  is  used  as  a 
basis  for  determining  the  justice  of  rates. 

(4)  That  the  factors  of  necessity  as  to  time  and 
location  must  be  considered  in  establishing  the  value 
of  railroad  real  estate,  and  the  cost  of  acquisition 
must  be  included  therein,  as  well  as  the  original 
amount  actually  paid    (or  estimated)    for  damage 
to  adjacent  land  and  improvements,  if  the  owners 
of  the  railroad  land  are  to  be  placed  on  a  parity 
with  other  land  owners. 


210  VALUATION  AND  RATES 

If  the  cost  of  reproduction  new  of  the  land  is  to 
be  found,  consideration  must  be  given  to  the  adjust- 
ment of  the  boundaries  of  abutting  land  to  the  lands 
of  the  railroad  which  has  occurred  since  the  time 
of  original  construction. 

Where  the  line  of  the  proposed  reproduced  rail- 
road would  divide  the  parcel  or  tract  of  land  of  any 
owner,  consequential  damage  to  land  and  improve- 
ments not  taken  must  be  considered  and  allowed  as 
a  part  of  the  cost  of  reproduction. 

(5)  That  certain  percentages — to  be  determined 
as  far  as  possible  from  the  available  records  of  the 
railroad  under  valuation,  supplemented  by  general 
experience,  where  such  records  are  incomplete — be 
added  for  overhead  charges,  viz.,  Engineering  and 
General  Expenditures. 

(6)  That  a  percentage  be  added  for  Contin- 
gencies, the  amount  to  be  determined  by  the  char- 
acter of  the  work  being  valued. 

(7)  That  an  amount  be  added  for  Interest  dur- 
ing construction,  equal  to  the  interest  on  the  whole 
cost  of  all  items,  except  equipment,  for  a  period  of 
time  equal  to  one-half  the  estimated  time  required 
for  construction,  at  the  average  rate  which  the  par- 
ticular railroad  under  consideration  has  paid  for 
capital  or  borrowed  money,  during  the  ten-year  pe- 
riod preceding  valuation — or  during  the  first  half 
of  the  decade. 

(8)  That  an  amount  be  added  for  good  will  and 
going  value,  the  minimum  being  the  aggregate  of  all 
deficits  in  operating  expenses  and  fixed  charges  and 
lack  of  profits  occurring  between  the  completion  of 
the  railroad  and  the  time  at  which  it  returned  a 
profit  on  the  actual  value  of  the  property. 

This  minimum  is  to  be  determined  from  the  rec- 
ords of  the  corporation,  when  these  are  available, 


VALUATION  211 

or  estimated  on  the  basis  of  the  recorded  experience 
of  roads  similarly  situated  when  they  are  not. 

That  other  elements  of  going  value  be  considered 
on  each  system  particularly. 

(9)  That  for  the  embankments,  excavations,  ma- 
sonry, permanent  culverts  and  other  non-removable, 
permanent  structures  on  abandoned  lines,  their  cost 
be  added  to  the  value  of  the  existing  operated  lines 
as  a  development  cost. 

(10)  As  a  corollary  of   (8)   and   (9),  the  total 
commercial  value  of  a  railroad  does  not  necessarily 
bear  a  direct  relation  to  the  cost  of  ^reproducing  its 
physical  property  or  the  amount  of  its  capitalization. 

(11)  That  the   Federal   Valuation,   now   being 
made,  will  affect  the  credit  of  the  railroads  advan- 
tageously, if  based  on  the  same  principles  as  are  ap- 
plied in  determining  other  commercial  values. 

Current  depreciation  is  an  inevitable  accompani- 
ment of  railroad  operation.  If  it  is  to  be  deducted 
from  capital  or  present  value  (the  investment  being 
impaired),  an  investor  in  railroad  securities  is  as- 
sured, in  advance,  of  a  large  shrinkage  in  the  value 
of  his  investment.  If  depreciation  (other  than  de- 
ferred maintenance)  is  deducted  from  reproduction 
cost,  to  determine  present  value  of  railroad  property, 
and  the  public  come  to  regard  such  value  as  the  in- 
trinsic worth  of  the  property,  and  the  amount  on 
which  railroads  will  be  allowed  to  earn  a  fair  return, 
railroad  borrowing  for  the  purpose  of  providing  ex- 
tensions and  betterments  of  existing  railroads  will 
be  practically  barred. 


RATES 
Basis  of  Rate  Making 

Railroads  were  first  opened  to  public  use  in  Eng- 
land in  1830.  From  the  speeches  in  the  English 
Parliament  in  1836  to  the  present  moment,  the  dis- 
cussion of  the  proper  basis  for  rate  making  has  been 
persistent.  Speaking  broadly,  there  are  two  possible 
methods  of  making  rates:  (1)  One  based  on  Cost 
of  Service  and  (2)  the  other  based  on  Value  of 
Service.  There  is  in  addition,  of  course,  a  basis  com- 
bining both  methods  and  other  conditions. 

It  may  be  said,  in  advance  of  the  following  dis- 
cussion, that  all  tariffs  of  railway  rates,  in  all  coun- 
tries, whether  the  railways  be  owned  and  operated 
by  the  State  or  by  private  corporations,  always  have 
been,  now  are,  and,  so  far  as  students  of  the  matter 
are  able  to  judge,  always  will  be  based  on  the  second 
method,  in  combination  with  other  conditions,  limited 
in  all  cases,  as  to  the  minimum  charge,  by  cost  of 
service. 

In  a  matter  of  such  vital  public  interest,  however, 
it  is  well  to  understand  the  reasons  for  the  adoption 
of  any  particular  method  rather  than  another,  espe- 
cially in  these  days,  when  many  subjects  heretofore 
considered  settled  finally  are  being  re-investigated, 
tested  and  adapted  to  a  changing  economical  and 
social  condition. 

Cost  of  Service 

The  schedule  of  railroad  rates  as  a  whole  must 
provide  for : 

(1)      Cost  of  Conducting  Transportation. 


RATES  213 

(2)  Cost   of   maintaining   Roadbed,    Structures 
and  Equipment. 

(3)  Payment  of  interest  on  investment  (on  capi- 
talization or  valuation),  rentals,  taxes  and  all  other 
fixed  charges. 

(4)  Profit  to  the  operators  of  the  transportation 
facilities. 

Cost  of  Service  involves  consideration  of  Capital- 
ization, Valuation,  Expenditures  for  Operating  Ex- 
pense and  Income.  These  several  subjects  will  be 
discussed  in  turn. 

Capitalization 

The  total  length  of  line  of  railroads  of  the  United 
States  reported  by  the  Interstate  Commerce  Com- 
mission in  1914,  representing  more  than  98  per  cent 
of  the  entire  mileage  of  the  country,  is  nearly  250,000 
miles,  the  total  capitalization  nearly  $16,000,000,000, 
the  actual  average  capitalization  per  mile  being 
$66,661. 

As  to  the  real  value  of  the  property,  compared 
with  its  capitalization,  it  may  be  said  of  the  rail- 
roads, as  a  whole,  that  the  valuation  now  being  made 
by  the  Interstate  Commerce  Commission  will  prob- 
ably show  a  larger  gross  amount  than  the  total  cap- 
italization, judging  from  the  results  obtained  by  in- 
dependent valuations  which  have  been  made  here- 
tofore. 

For  the  purpose  of  this  discussion,  then,  the  two 
terms,  capitalization  and  valuation,  may  be  regarded 
as  synonomous.  It  must  be  remembered,  however, 
that  as  to  particular  roads,  the  valuation  will  in  some 
cases  exceed  and  in  others  be  less  than  the  capital- 
ization, as  explained  in  the  chapter  on  Valuation. 
Certain  relations  between  valuation  and  rates  are 
discussed  in  succeeding  pages. 

It  has  cost  much  to  construct  railroads,  and,  in 
comparison  with  such  cost,  little  to  maintain  them. 


214  VALUATION  AND  RATES 

For  the  whole  country  the  capital  is  nearly  16  billion 
dollars,  the  annual  maintenance  cost,*  nine  hundred 
and  fifty  million  dollars,  or  practically  six  per  cent 
of  the  capital  cost. 

The  profit  of  any  business  depends  largely  on  the 
extent  to  which  its  facilities  are  kept  constantly  em- 
ployed. A  railroad  can  not  employ  its  facilities 
fully,  except  on  the  main  trunk  lines — and  only  at 
times  as  to  them. 

With  a  volume  of  traffic  nearly  equal  to  its  ca- 
pacity, the  receipts  of  a  railroad  will  be  relatively 
high,  as  compared  with  its  capital,  and  in  conse- 
quence the  charge  for  capital  will  be  light  per  unit 
of  traffic,  or,  stated  concisely,  the  greater  the  volume 
of  traffic  the  smaller  the  capital  charge  per  unit  of 
traffic.  The  exception  to  this  is  that  immediately 
after  additional  tracks  or  other  facilities  are  con- 
structed, even  with  a  greater  density  of  traffic,  the 
cost  per  unit  may  be  greater  for  a  time,  as  the  in- 
creased capital  charge  is  spread  over  traffic  but 
slightly  increased. 

On  branch  and  secondary  main  lines,  even  though 
the  capitalization  per  unit  of  length  (as  per  mile) 
is  less  than  that  of  main  trunk  lines — on  account  of 
lower  standards  as  to  grades  and  other  items  affect- 
ing the  cost  of  construction  in  a  large  measure — the 
capital  cost  per  unit  of  traffic  is  greater  on  account 
of  less  density  of  traffic.  For  this  reason,  such 
branch  and  secondary  main  lines  should  be  allowed 
to  charge  higher  rates  per  unit  of  traffic  than  obtain 
on  lines  of  dense  traffic. 

The  following  table,  compiled  from  the  1913  sta- 
tistics of  the  Interstate  Commerce  Commission,  will 
illustrate  the  fact  that  the  capitalization  per  unit  of 
traffic  is  less  as  the  traffic  density  increases : 

*Maintenance  of  roadway,  structures  and  equipment. 


RATES  215 


C£ 

Railroads                                Mi 
i 

Pennsylvania  Railroad  .  .  : 
Illinois  Central  

Traffic 
Units* 
ipital  per      per  Mile 
le  of  Line      of  Line 
Q  Dollars,    in  Thousands. 

163,192         6,160 
66,389         1,700 
51,727          1,260 
57,131             904 
43,121             528 
18,455             174 

Capitalt 
per 
Unit  of 
Traffic 
in  Cents. 

2.72 

3.90 
4,10 
6.32 
8.17 
10.58 

Louisville  &  Nashville  .  . 
Atch.,  Top.  &  Santa  Fe.  . 
Atlantic  Coast  Line  .... 
Manistee  &  N.  Eastern  .  . 

*Trafflc  Units,  as  employed  in  this  discussion,  are  passenger 
miles  plus  freight  ton-miles. 

t  Capital  per  Unit  of  Traffic  is  capital  per  mile  in  first  column 
divided  by  Traffic  Units  of  second  column. 

This  table  shows  that  on  systems  of  light  traffic 
and  on  branch  lines,  the  portion  of  the  total  cost  of 
service  which  relates  to  the  payment  of  interest  on 
capital,  that  is,  fixed  capital  charges,  is  greater  per 
unit  of  traffic  than  on  roads  with  dense  traffic.  The 
Pennsylvania,  with  a  capital  per  mile  nine  times  as 
large  as  the  Manistee  &  North  Eastern,  has  only 
26%  as  much  capital  per  unit  of  traffic  as  the  latter 
road — that  is,  the  cost  for  capital  per  traffic  unit 
on  the  Manistee  &  North  Eastern  is  four  times  as 
great  as  on  the  Pennsylvania. 

Relation   of   Traffic   to   Operating   Expense 
General 

In  order  to  understand  some  phases  of  the  eco- 
nomics of  rates,  certain  relations  which  exist  between 
Traffic  and  Operating  Expense  must  be  understood. 
It  does  not  cost  as  much  per  unit  of  traffic  to  haul 
long  distances  as  it  does  shorter  ones.  It  costs  less 
per  unit  to  haul  traffic  when  5  million  tons  per  mile 
of  line  are  moved  than  when  1  million  tons  per  mile 
of  line  are  moved. 

This  is  true  beyond  dispute,  for  the  statistics  of 
actual  operation  show  it  clearly.  But  the  reasons 


216  VALUATION  AND  RATES 

why  it  is  true  and,  what  is  more  essential  to  know, 
how  much  less  it  does  cost,  cannot  be  understood  ex- 
cept by  making  a  detailed  analysis  of  operating  ex- 
pense for  different  traffic  conditions.  Fortunately 
for  the  investigator,  there  is  sufficient  authentic  data 
available  for  the  purpose  of  general  analysis. 

Interstate  Commerce  Commission  Statistics 

The  Interstate  Commerce  Commission  since  1887 
has  required  the  railroads  to  make  reports  to  it  of 
their  operating  expense.  These  are  made  on  pre- 
scribed forms  by  over  98%  of  the  railroads  in  the 
United  States. 

One  form  for  large  roads — that  is,  roads  whose 
annual  revenues  are  in  excess  of  $1,000,000 — divides 
operating  expense  into  five  main  classes,  which  are 
subdivided  into  117  subitems.  The  other  form  for 
small  roads — roads  whose  annual  revenues  are  be- 
tween $100,000  and  $1,000,000 — divides  the  expense 
into  five  main  classes,  which  are  subdivided  into  44 
subitems. 

These  statistics,  based  on  uniform  classification  of 
all  items  of  operating  expense,  furnish  the  data  nec- 
essary in  making  an  analysis  of  it.  They  are  used 
by  engineers  in  analyzing  the  effects  of  distance, 
grades,  and  curvature  on  operating  expense,  and  are 
applied  practically  to  the  location  and  construction 
of  railroads ;  by  the  operating  department  in  investi- 
gating the  efficiency  of  its  organization  in  managing 
the  property,  and  they  should  be  employed  in  deter- 
mining the  true  relation  which  exists  between  traffic 
and  operating  expense. 

In  the  following  table,  the  five  main  classes  into 
which  operating  expense  is  divided  are  shown  at 
the  head  of  the  columns  and  the  relation  which  each 
class  of  expense  bears  to  the  total  operating  expense 
is  shown  by  percentages  for  a  period  of  seven  years. 


RATES  217 

The  figures  are  the  average  of  all  roads  of  the  coun- 
try reporting  to  the  Interstate  Commerce  Commis- 
sion. 

What  this  table  means,  simply  stated,  is  that  of 
each  dollar  spent  by  the  average  railroad  for  operat- 
ing, a  little  more  than  19  cents  is  spent  on  account 
of  maintaining  the  track,  bridges,  buildings,  and 
other  structures  of  the  company ;  that  about  23  cents 
of  each  dollar  is  spent  on  account  of  maintaining  lo- 
comotives, cars,  and  shop  machinery  used  in  repair- 
ing or  renewing  them;  that  3  cents  is  spent  by  the 
Traffic  Department  in  securing  and  looking  after  the 
traffic  moved ;  that  51  cents  is  spent  in  providing  train 
and  switching  crews,  station  employees,  fuel,  lubri- 
cants, and  water  for  engines,  and  other  things  re- 
quired in  actually  moving  the  trains ;  that  4  cents  is 
spent  for  paying  the  salaries  and  office  expense  of 
general  officers,  for  insurance,  pensions  and  similar 
items. 

Main  Divisions  of  Operating  Expenses 

Showing  percentage  of  each  class  to  total. 


Year. 

(i) 

Maint. 
of  Way. 
Per  Cent. 

(2) 
Maint. 
Equip. 
Per  Cent. 

Traffic. 
Per  Cent. 

Transpor- 
tation. 
Per  Cent. 

Gen- 
eral Ex- 
penditure. 
Per  Cent. 

1908  

19.73 

22.06 

2.89 

52.01 

3.31 

1909  

19.29 

22.75 

3.08 

50.90 

3.98 

1910  

20.22 

22.66 

3.07 

50.29 

3.76 

1911  

18.87 

22.54 

3.12 

51.75 

3.72 

1912  

18.35 

23.02 

3.11 

51.87 

3.65 

1913   

19.24 

23.70 

2.91 

50.63 

3.52 

1914  

19.13 

24.13 

2.89 

50.02 

3.83 

Average  . 

19.22 

22.99 

3.02 

51.08 

3.69 

(1)  Maintenance  of  Way  and   Structures. 

(2)  Maintenance  of  Equipment. 

The  table  shows  that  the  percentage  which  each 
class  of  expense  bears  to  the  total  operating  expense 
is  very  nearly  uniform  from  year  to  year. 


218  VALUATION  AND  RATES 

'&      •      |       5  •  -.        : 

The  'following  tables**  show  the  percentage 
which  each  one  of  the  117  items  of  expense  bears  to 
the  total  operating  expense  for  the  year  ended  June 
30,  1914.  For  instance,  3  cents  of  the  average  rail- 
road dollar  was  spent  in  renewing  ties;  nearly  7 
cents  for  keeping  up  the  roadbed  and  track;  a 
little  more  than  8  cents  for  repairing  locomotives; 
8%  cents  for  repairing  freight  cars;  about  6  cents 
to  pay  locomotive  engineers;  91/2  cents  for  furnish- 
ing the  road  engines  with  coal;  and  so  on  through 
the  list,  the  relative  expense  for  each  item  is  shown. 

Summary  showing  classification  of  operating  ex- 
penses for  the  year  ending  June  30th,  1914,  and  pro- 
portion of  each  class  to  the  total. — Large  Roads* 

Operating  Expense  Percent 

of  Total 

Item  Operating 

No.        Maintenance  of  Way  and  Structures  Expense 

1.  Superintendence  of  way  and  structures 0.977 

2.  Ballast 332 

3.  Ties  3.074 

4.  Rails 875 

5.  Other  track  material 987 

6.  Roadway  and  track 6.846 

7.  Removal  of  snow,  sand,  and  ice - 266 

8.  Tunnels    051 

9.  Bridges,  trestles,  and  culverts 1.685 

10.  Over  and  under  grade  crossings 071 

11.  Grade  crossings,  fences,  cattle  guards  and  signs 329 

12.  Snow  and  sand  fences  and  snowsheds 021 

13.  Signals  and  interlocking  plants 546 

14.  Telegraph  and   telephone  lines 217 

15.  Electric  power  transmission 037 

16.  Buildings,   fixtures  and  grounds 1.747 

17.  Docks  and  wharves 152 

18.  Roadway  tools  and  supplies 249 

19.  Injuries  to  persons 144 

20.  Stationery  and  printing 037 

21.  Other   expenses    Oil 

22.  Maintaining  joint  tracks,  yards  and  other  facilities — Dr.       .773 

23.  Maintaining  joint  tracks,  yards  and  other  facilities — Cr.       .561 


Total  maintenance  of  way  and  structures 18.866 

*Roads  having  annual  earnings  in  excess  of  $1,000,000. 

**These  tables  show  the  average  for  all  roads  reporting  to  the 
Interstate  Commerce  Commission. 


RATES  219 

Per  Cent 
of  Total 

Item  Operating 

No.  Expense 

Maintenance  of   Equipment 

24.  Superintendence   of  equipment 704 

25.  Steam  locomotives — repairs 8.183 

26.  Steam  locomotives — renewals 132 

27.  Steam  locomotives — depreciation    1.027 

28.  Electric  locomotives — repairs   036 

29.  Electric  locomotives — renewals 

30.  Electric  locomotives — depreciation  012 

31.  Passenger — train  cars — repairs  1.523 

32.  Passenger — train  cars — renewals   050 

33.  Passenger — train  cars — depreciation 298 

34.  Freight — train  cars — repairs   8.510 

35.  Freight — train  cars — renewals    597 

36.  Freight — train  cars — depreciation  2.001 

37.  Electric  equipment  of  cars — repairs 014 

38.  Electric  equipment  of  cars — renewals * 

39.  Electric  equipment  of  cars — depreciation 007 

40.  Floating  equipment — repairs 044 

41.  Floating  equipment — renewals 003 

42.  Floating  equipment — depreciation 019 

43.  Work  equipment — repairs   228 

44.  Work  equipment — renewals 038 

45.  Work  equipment — depreciation    079 

46.  Shop  machinery  and  tools 546 

47.  Power  plant  equipment 018 

48.  Injuries  to  persons 117 

49.  Stationery  and  printing 054 

50.  Other  expenses 025 

51.  Maintaining  joint  equipment  at  terminals,  Dr 087 

52.  Maintaining  joint  equipment  at  terminals,  Cr 044 


Total  maintenance  of  equipment 24.311 

*Less  than  0.001  per  cent. 


Traffic 

53.  Superintendence  of  traffic 765 

54.  Outside  agencies  1.137 

55.  Advertising 379 

56.  Traffic  associations   071 

57.  Fast  freight  lines 154 

58.  Industrial  and  immigration  bureaus 082 

59.  Stationery  and  printing 320 

60.  Other  expenses 006 


Total  traffic  expenses 2.914 


Transportation 

61.  Superintendence  of  transportation 1.256 

62.  Dispatching  trains   845 

63.  Station  employes  6.886 

64.  Weighing  and  car-service  associations 117 


220  VALUATION  AND  RATES 

Per  Cent 
of  Total 

Item  Operating 

No.  Expense 

65.  Coal  and  ore  docks 176 

66.  Station  supplies  and  expenses 574 

67.  Yardmasters  and  their  clerks 850 

68.  Yard  conductors  and  brakemen 2.830 

69.  Yard  switch  and  signal  tenders 213 

70.  Yard  supplies  and  expenses 079 

71.  Yard  enginemen 1.637 

72.  Enginehouse  expenses — yard 524 

73.  Fuel  for  yard  locomotives 1.570 

74.  Water  for  yard  locomotives 109 

75.  Lubricants  for  yard  locomotives 030 

76.  Other  supplies  for  yard  locomotives 035 

77.  Operating  joint  yards  and  terminals — Dr 1.332 

78.  Operating  joint  yards  and  terminals — Cr 793 

79.  Motormen    048 

80.  Road  enginemen 5.947 

81.  Enginehouse  expenses — road 1.729 

82.  Fuel  for  road  locomotives 9.423 

83.  Water  for  road  locomotives 617 

84.  Lubricants  for  road  locomotives 175 

85.  Other  supplies  for  road  locomotives 191 

86.  Operating  power  plants 058 

87.  Purchased  power    048 

88.  Road  trainmen   6.415 

89.  Train  supplies  and  expenses 1.843 

90.  Interlockers  and  block  and  other  signals — operation 532 

91.  Crossing  flagmen  and  gatemen 360 

92.  Drawbridge  and  operation 049 

93.  Clearing  wrecks 267 

94.  Telegraph  and  telephone — operation 296 

95.  Operating  floating  equipment 145 

96.  Express  service .002 

97.  Stationery  and  printing 425 

98.  Other  expenses   129 

99.  Loss  and  damage — freight 1.555 

100.  Loss  and  damage — baggage 014 

101.  Damage  to  property 204 

102.  Damage  to  stock  on  right  of  way 190 

103.  Injuries  to  persons 1.233 

104.  Operating  joint  tracks  and  facilities — Dr 284 

105.  Operating  joint  tracks  and  facilities— Cf .257 


Total  transportation  expenses 50.192 


General 

106.  Salaries  and  expenses  of  general  officers 481 

107.  Salaries  and  expenses  of  clerks  and  attendants 1.542 

108.  General  office  supplies  and  expenses 182 

109.  Law  expenses   564 

110.  Insurance  350 

111.  Relief  department  expenses .034 


RATES  221 


Per  Cent 
of  Total 

Item  Operating 

No.  Expense 

112.  Pensions    174 

113.  Stationery  and  printing 159 

IIS1^.  Valuation  expenses 078 

114.  Other   expenses 122 

115.  General   administration,   joint   tracks,   yards   and   ter- 

minals— Dr 046 

116.  General  administration,   joint   tracks,   yards   and   ter- 

minals— Cr 015 

Total  general  expenses 3.717 


Recapitulation  of  Operating   Expenses 

1.  Maintenance  of  way  and  structures 18.866 

2.  Maintenance  of  equipment 24.311 

3.  Traffic  expenses 2.914 

4.  Transportation  expenses 50.192 

5.  General  expenses 3.717 

Total  operating  expenses 100.000 

Ratio  of  operating  expenses  to  operating  revenue..   72.048 

Summary  showing  classification  of  operating  ex- 
penses for  the  year  ending  June  30,  1914,  and  pro- 
portion of  each  class  to  the  total. — Small  Roads* 


Operating  Expense  Percent 

Item  Operating 

No.         Maintenance  of  Way  and   Structures  Expense 

1.  Superintendence  of  way  and  structures 1.268 

2.  Maintenance  of  roadway  and  track 19.182 

3.  Maintenance  of  track  structures 3.972 

4.  Maintenance  of  buildings,  docks  and  wharves 1.500 

5.  Injuries  to  persons 108 

6.  Other  maintenance  of  way  and  structure  expenses 536 

7.  Maintaining  joint  tracks,  yards  and  other  facilities — Dr.      .681 

8.  Maintaining  joint  tracks,  yards  and  other  facilities — Cr.     1.494 

Total  maintenance  of  way  and  structures 25.753 


Maintenance  of   Equipment 

9.  Superintendence  of  equipment 974 

10.  Locomotives — repairs   6.230 

*Roads   having   earnings   between    $100,000   and   $1,000,000   an- 
nually. 


222  VALUATION  AND  RATES 


Per  Cent 
of  Total 

Item  Operating 

No.  Expense 

11.  Cars— repairs    7.331 

12.  Floating  equipment — repairs 036 

13.  Work  equipment — repairs    197 

14.  Equipment — renewals     483 

15.  Equipment — depreciation  3.786 

16.  Injuries  to  persons 068 

17.  Other  maintenance  of  equipment  expense 631 

18.  Maintaining  joint  equipment  at  terminals — Dr 037 

19.  Maintaining  joint  equipment  at  terminals — Cr 059 

Total  maintenance  of  equipment 19.714 


Traffic 
20.  Traffic  expenses 2.317 


Transportation 

21.  Superintendence  and  dispatching  trains 2.138 

22.  Station  service   7.340 

23.  Yard  enginemen 908 

24.  Other  yard  employees 1.637 

25.  Fuel  for  yard  locomotives 1.303 

26.  All  other  yard  expenses 419 

27.  Operating  joint  yards  and  terminals — Dr 1.265 

28.  Operating  joint  yards  and  terminals — Cr 971 

29.  Road  enginemen  and  motormen 5.949 

30.  Fuel  for  road  locomotives 11.196 

31.  Other  road  locomotive  supplies  and  expenses 2.979 

32.  Road  trainmen   6.640 

33.  Train  supplies  and  expenses 1.114 

34.  Injuries  to  persons 1.091 

35.  Loss  and  damage 648 

36.  Other  casualties    668 

37.  All  other  transportation  expenses 1.557 

38.  Operating  joint  tracks  and  facilities— Dr 472 

39.  Operating  joint  tracks  and  facilities — Cr 750 

Total  transportation   45.603 


General  Expenses 

40.  Administration    5.529 

41.  Insurance    674 

42.  Other  general  expenses 535 

43.  General   administration,  joint  tracks,  yards,   and  ter- 

minals— Dr 034 

44.  General  administration,  joint  tracks,  yards,   and  ter- 

minals— Cr 159 


Total  general  expenses 6.613 


RATES  223 

Fixed  Operating  Expense 

An  examination  of  the  117  items  into  which  Oper- 
ating Expense  is  divided  in  the  first  table  will  show 
that  some  of  the  items  are  not  affected  at  all  by  the 
amount  of  traffic  carried,  some  are  directly  pro- 
portional to  it,  and  some  are  only  partly  affected. 
If  we  analyze  the  effect  which  traffic  has  on  each 
item,  we  will  be  able  to  say  definitely  what  part  of 
the  expense  is  dependent  on  the  volume  of  traffic 
and  what  other  part  is  independent  of  it,  or,  in  other 
words,  there  are  certain  fixed  expenses  which  would 
be  incurred  whether  the  volume  of  traffic  moved  was 
100,000  or  1,000,000  tons  per  mile  of  line. 

Maintenance  of  Way  Expense 

The  American  Railway  Engineering  Association, 
composed  of  engineers  engaged  in  the  construction 
and  maintenance  of  railways,  have  investigated 
thoroughly  what  factors  have  an  effect  on  the  op- 
erating expense  of  maintaining  the  roadway  and 
structures. 

The  committee  of  the  association  investigating  this 
special  matter  reported  that  of  the  23  items  of  main- 
tenance of  way  expense,  7  were  affected  by  the  vol- 
ume of  the  traffic  and  the  balance  were  not.  The 
items  affected  are  Superintendence,  Ties,  Rails, 
Other  Track  Material  (rail  fastenings,  switches, 
etc.),  Roadway  and  Track  (principally  section 
labor) ,  Buildings,  Tools  and  Supplies. 

The  maintenance  expense  on  account  of  ties  is  due 
to  two  causes — decay  and  mechanical  wear.  The 
amount  due  to  mechanical  wear  is  proportional  to 
the  volume  of  the  tonnage  of  the  trains:  Using  the 
average  volume  of  tonnage  for  all  "Large  Roads" 
for  1914  and  the  factors  for  determining  mainte- 
nance expense  due  to  mechanical  wear,  as  found  by 
the  association  named,  the  average  cost  of  mainte- 


224  VALUATION  AND  KATES 

nance  of  ties  due  to  age  and  decay  is  80%,  and  for 
maintenance  caused  by  the  traffic,  20%.** 

The  operating  expense  on  account  of  rails  is  due 
to  corrosion,  and  wear  from  train  operation.  The 
effect  of  corrosion  on  expense  is  very  small  and  the 
whole  expense  of  rail  maintenance  may  be  charged 
against  the  traffic.  The  same  is  true  of  "Other  Track 
Material." 

Using  the  factors  determined  by  the  engineering 
association  before  referred  to,  50%  of  the  expense 
of  Superintendence,  Roadway  and  Track  and  Road- 
way Tools  and  supplies  are  due  to  the  volume  of 
traffic. 

Maintenance  cost  of  buildings  is  not  appre- 
£iably  affected  by  volume  of  traffic.  It  is  evi- 
dent that  the  cost  of  maintenance  for  such  items  as 
Removal  of  Snow,  Bridges  and  Culverts,  Telegraph 
and  Telephone,  Grade  Crossings,  Fences  and  Cattle 
Guards,  and  the  balance  of  the  23  items  in  this  class 
are  not  affected  at  all  by  the  volume  of  traffic,  the 
expense  being  the  same  whether  1  or  10  trains  per 
day  are  operated. 

We  can  now  show  what  portion  of  maintenance  of 
way  expense  is  affected  by  the  traffic  and  the  balance 
is  a  fixed  operating  expense  which  is  incurred  inde- 
pendently of  the  volume  of  traffic  carried. 

Percentage 
of  Total 

Per  Cent  Percentage  Operating 

Item  Affect-      of  Total      Expense 

No.  Item.  ed  by    Operating       Due  to 

Traffic.     Expense*       Traffic. 

1     Superintendence 50%  0.977  0.488 

3  Ties    20%  3.074  0.615 

4  Rails 100%  0.875  0.875 

5  Other  Track  Material .  100%  0.987  0.987 


**This  will  vary  with  roads  of  different  traffic  density  and  dif- 
fering class  of  ties. 

*Average  for  all  large  roads  of  the  country  as  shown  by  a 
preceding  table. 


RATES  225 

6     Roadway  and  Track..     50%     6.846     3.423 
18     Road-way    Tools    and 

Supplies 50%     0.249       .125 

Percentage  of  Total 
Operating  Expense 
due  to  Traffic 6.513 

The  total  for  all  items  of  maintenance  of  way  ex- 
pense is  18.866,  as  shown  by  a  preceding  table,  which 
determines  the  fact  that  66%  of  all  maintenance  of 
way  expense  is  a  fixed  expense  (  •&.¥& )  an(*  that 
only  34%  of  it  is  due  to  the  volume  of  traffic.  This 
is  of  very  great  importance  in  connection  with  rate- 
making;  its  application  will  be  shown  later. 

Maintenance  of  Equipment  Expense 

Continuing  the  analysis  of  the  next  class  of  Op- 
erating expense  items,  Maintenance  of  Equipment, 
we  find  that  all  of  the  operating  expense  items  are 
dependent  on  the  volume  of  traffic  moved,  except 
a  part  of  the  expense  of  repairs,  renewals,  and  de- 
preciation of  locomotives  (items  25-27)  f,  passenger- 
train  cars  (31-35),  freight-train  cars  (34-36),  and 
work  equipment  (43-45). 

A  careful  analysis  of  these  items  of  repairs,  re- 
newals, and  depreciation  of  equipment  was  made  by 
Wellington*  from  the  records  of  several  large  rail- 
road systems.  He  found  that  the  cost  of  painting 
and  other  work  on  locomotives,  which  is  due  to  age, 
weather,  and  other  conditions  not  dependent  on 
traffic,  was  7%  of  the  maintenance  cost. 

About  50%  of  the  cost  of  passenger  car  repairs  is 
for  painting  and  other  items  which  are  due  to  age 

fThese  numbers  refer  to  the  Item  Number  in  the  table  show- 
ing- the  classification  of  items  of  operating  expense. 

*  "Economic  Theory  of  Railroad  Location,"  by  A.  M.  Welling- 
ton, C.  E. 


226  VALUATION  AND  RATES 

and  not  therefore  dependent  on  volume  of  traffic. 
A  large  part  of  the  expense  of  maintaining  freight 
and  work  cars  is  due  to  painting  and  to  the 
decay  of  the  wood  of  which  they  are  largely  con- 
structed. If  we  take  30%  of  the  maintenance  cost 
as  due  to  age,  and  therefore  independent  of  the 
traffic,  we  will  be  very  near  the  truth. 
Tabulating  this  data  we  have: 

Percentage 

Percent-       Per-        of  Total 
,  age  not     centage    Operating 

Affect-    of  Total       Expense 

Item  ed  by    Operating     not  due 

No.  Item.  Traffic    Expense     to  Traffic 

25-27  Steam  Locomotives ...    7%  9.342  0.654 

31-33  Passenger-Train  Cars. 50%  1.871  0.936 

34-36  Freight-Train  Cars... 30%  11.111  3.333 

43-45  Work  Equipment 30%  0.335  0.101 

Percentage  of  Total  Expense  not  due  to 

Traffic    5.024 

Dividing  this  5.024  by  24.311,  the  total  for  all 
items  of  equipment  operating  expense,  we  have 
20.7%  (say,  20%)  of  the  total  maintenance  of  equip- 
ment expense  due  to  other  causes  than  the  traffic. 

Expense  of  Conducting  Transportation 

Of  the  45  items  of  expense  due  to  Conducting 
Transportation  all  except  14  are  directly  affected  by 
an  increase  in  volume  of  traffic. 

On  such  items  as  the  wages  of  enginemen,  train- 
men, switchmen,  fuel,  water,  and  lubricants  for  lo- 
comotives, which  make  up  the  larger  part  of  trans- 
portation expense,  an  increase  in  volume  of  traffic 
increases  the  expense  almost  in  direct  proportion. 
On  the  14  items,  however,  certain  portions  of  the 
expense  will  be  incurred  independent  of  the  volume 
of  traffic  moving. 


RATES  227 

The  percentages  used  in  the  following  are  ap- 
proximations only,  as  an  accurate  division  of  the 
expense  can  not  be  made  between  the  fixed  expense 
and  that  varying  with  the  traffic.  Such  approxima- 
tions are,  however,  very  near  the  truth  and  will 
answer  every  purpose  for  which  the  data  is  to  be 
employed. 

Superintendence  of  transportation  (item  61)  is 
only  partly  increased  by  increased  volume  of  traffic 
— that  is,  there  is  a  certain  amount  of  supervision 
needed  whether  the  traffic  density  is  2  million  tons 
per  mile  of  line  or  four  million.  The  same  is  true 
of  Dispatcher's  forces  (62),  as  there  might  be  a 
considerable  addition  in  volume  of  traffic  (and 
therefore  number  of  trains)  without  increasing  the 
force  employed. 

Station  employees'  (63)  expense  is  made  up  in 
greater  part  of  salaries  and  expenses  at  smaller  sta- 
tions. Considerable  increases  of  traffic  would  not 
affect  such  expense.  The  expense  at  terminal  sta- 
tions where  many  laborers  are  employed  varies 
more  nearly  with  the  traffic  but  does  not  increase 
in  direct  proportion  to  it,  as  certain  employees,  such 
as  the  agent  and  the  larger  part  of  his  office  force, 
must  be  retained  irrespective  of  the  volume  of  busi- 
ness. 

If  we  say  that  for  Superintendence,  Dispatching, 
Coal  and  Ore  Docks,  and  Station  Employees,  75% 
of  the  expense  is  not  affected  by  increases  in  the 
volume  of  traffic,  we  are  very  near  the  truth.  Such 
items  as  switch  tenders  (69),  signalmen,  crossing 
flagmen,  drawbridge  operation  (90-92),  and  repairs 
of  telegraph  line  (94)  are  entirely  independent  of 
the  traffic. 

The  Enginehouse  expense  for  yard  (72)  and  road 
engines  (81)  are  not  directly  proportional  to  traffic 
as  a  considerable  part  of  the  organization  must  be 
employed  irrespective  of  volume  of  traffic,  say  25%. 


228 


VALUATION  AND  RATES 


Tabulating  this  data,  for  the  purpose  of  obtaining 
the  proportion  of  fixed  expense,  we  have: 


Percent- 
age not 
Affect- 
ed by 
No.  Item  Traffic 

61  Supt.  of  Transportation  75% 

62  Dispatching  trains 75 

63  Station  Employees 75 

65  Coal  &  Ore  Docks 75 

66  Station     Supplies     and 

Expenses 75 

69  Yard  Switch  &  Signal 

Tenders  100 

72  Enginehouse  Expenses 

(yard)  25 

81  Enginehouse  Expenses 

(road)    25 

89  Train   Supplies    &    Ex- 

penses     25 

90  Signal  Operation 100 

91  Crossing     Flagmen     & 

Gatemen 100 

92  Drawbridge  Operation.  100 
94     Telegraph  &  Telephone 

(line  repairs) 100 

97     Stationery  &  Printing.  .   50 


Percentage  of 

Per-    Total  Oper- 

centage    ating  ex- 

of  Total     pense  not 

Operating   Affected 

Expense   by  Traffic 

1.256%      0.942 
0.845         0.634 


6.886 
0.176 


5.165 
0.132 


0.574         0.431 
0.213         0.213 


0.524 
1,729 

1.843 
0.532 

0.360 
0.049 

0.296 
0.425 


0.131 
0.432 

0.461 
0.532 

0.360 
0.049 

0.296 
0.212 


Percentage  of  Total  Operating  Expense 
not  affected  by  the  Volume  of  Traffic. 9.990 

Dividing  this  9.990  by  50.192  the  total  for  all 
transportation  expense,  we  have  20%  of  the  trans- 
portation expense  which  is  independent  of  the  vol- 
ume of  traffic  moved  and  80%  which  is  dependent  on 
the  traffic. 

Traffic  Expense  and  General  Expense  are  not  ap- 
preciably affected  by  the  addition  of  a  very  consid- 


RATES 


229 


erable  volume  of  traffic  and  we  may  therefore  as- 
sume all  of  these  expenses  to  be  fixed  expenses. 


Total  Operating  Expenses 

Recapitulating  the  foregoing  data,  we  may  now 

tabulate  to  show  what  part  of  total  operating  ex- 
pense is  fixed  and  what  part  is  dependent  on  the 
volume  of  traffic  moved. 

Percentage  Percentage 

of  Total  of  Total          Percent- 
Operating  Operating         age  of 
Expense  Expense            Total 

Class  of  Ex-                             Affected  not  Affected       Oper- 

penditure                             by  Volume  by  Volume         ating 

of  Traffic.  of  Traffic.       Expense. 

Maintenance  of  Way 6.513  12.353                   18.866 

Maintenance  of  Equipment.   19.287  5.024                  24.311 

Traffic   None  2.914                     2.914 

Transportation    40.202  9.990                   50.192 

General   .                                          None  3.717                     3.717 


Fixed  Operating  Expense .   66.002 


33.998 


100.000 


This  table  shows  that  34%  of  all  operating  ex- 
pense is  a  fixed  expense,  and  is  incurred  whether  the 
volume  of  traffic  is  very  light  or  very  heavy. 

These  figures  apply  to  very  considerable  differ- 
ences in  volume  of  traffic.  In  the  case  of  slight  ad- 
ditions in  volume  of  traffic,  as  a  part  of  a  car  or  the 
adding  of  one  or  even  several  cars  to  the  average 
local  freight  train,  the  additional  expense  of  opera- 
tion on  account  of  additional  traffic  is  hardly  ap- 
preciable. 

Analysis  Sufficiently  Accurate  for  Practical  Purposes 

It  may  be  objected  to  this  form  of  analysis,  that 
it  is  not  scientifically  accurate,  in  that  it  involves  a 
division  of  certain  items  of  expense  on  an  arbitrary 
basis — on  such  items  as  superintendence,  salaries  of 
station  agents,  effect  of  different  classes  of  trains  on 


230  VALUATION  AND  RATES 

maintenance  expense  and  other  items  of  a  like  na- 
ture. 

It  is  true  that  there  is  room  for  some  difference 
of  opinion  as  to  the  percentages  to  be  assigned  to 
these  various  items  of  expense,  particularly  when 
average  statistics  for  the  whole  country  are  used  as 
a  basis  of  analysis.  Making  due  allowance  for  the 
personal  equation,  however,  there  is  not  room  for 
serious  variation  in  results  obtained  by  various 
estimators. 

The  foregoing  analysis  is  made  for  the  purpose  of 
establishing  the  probable  minimum  percentage  of 
total  expense  which  is  a  fixed  expense  and  if  that 
be  established,  with  reasonable  accuracy,  it  will  as- 
sist in  the  consideration  of  many  rate  questions  which 
are  not  otherwise  readily  understood.  In  the  estab- 
lishment of  the  minimum  rate  that  is  allowable,  the 
fixed  operating  expense  must  be  known  approxi- 
mately, to  avoid  making  rates  below  actual  cost  of 
service.  An  illustration  showing  the  necessity  for 
and  the  application  of  this  data  is  given  in  following 
pages. 

Effect  of  Traffic  Density  on  Operating  Expense 

If  our  deduction  in  regard  to  the  fixed  expense 
is  correct,  then  the  operating  expense,  per  unit  of 
traffic,  must  be  less  as  the  volume  of  traffic  increases, 
because  out  of  every  dollar  spent  34  cents  is  fixed, 
whether  the  volume  is  one  million  traffic  units  per 
mile  of  line  or  six  million  units,  although  the  actual 
amount  of  money  spent  per  mile  of  line  for  operating 
expense  in  maintaining  the  road  and  equipment  and 
conducting  transportation  will  be  very  much  greater 
on  the  road  of  great  traffic  density. 

To  test  the  accuracy  of  these  deductions,  the  fol- 
lowing table  was  prepared  from  the  operating  sta- 
tistics of  the  Interstate  Commerce  Commission  for 


RATES  231 

the  year  1913.  The  roads  shown  in  the  table  were 
selected  on  the  basis  of  difference  in  traffic  densities 
to  show  the  application  of  the  principle. 

The  traffic  density  of  the  Illinois  Central  is  very 
near  the  average  for  all  Class  I  roads  in  the  United 
States.  The  Pennsylvania  has  the  largest  revenue 
from  traffic  per  mile  of  line  and  the  greatest  traffic 
density  of  any  large  system  in  the  country.  The 
Manistee  &  North-Eastern  is  a  short  road  in  Michi- 
gan, operating  190  miles  of  line  with  least  traffic 
density. 

The  "Traffic  Units  per  Mile  of  Line"  in  the  fol- 
lowing table  is  the  sum  of  the  freight  ton-miles  and 
the  passenger-miles  per  mile  of  line.  The  expense 
per  Unit  of  Traffic  is  the  quotient  obtained  by  divid- 
ing the  total  operating  expense  per  mile  by  the 
Traffic  Units  per  mile,  which  affords  a  fair  means  of 
comparison. 

Total  Operating  Expenses  Per  Traffic  Unit — Roads 
of  Different  Traffic  Density 

Total  Traffic                Total 

Operating  Units            Operating 

Expense  Per  Mile           Expense 

Railroad                                      Per  Mile  of  Line,          Per  Unit 

of  Line.  Thousands.       of  Traffic. 

Pennsylvania  Railroad $33,800  6,160            .549  Cents 

Central  Railroad  of  New  Jersey.   24,700  4,228             .584 

Illinois  Central   10,690  1,710             .625 

Louisville   &   Nashville 9,150  1,260             .726 

Atchison,  Topeka  &  Santa  Fe...     7,770  904             .859 

Atlantic  Coast  Line 5,350  528  1.013 

Manistee  &  North-Eastern 2,170  174  1.246 

Comparing  the  roads  of  greatest  and  least  traffic 
density  the  Pennsylvania  spent  practically  15% 
times  as  much  per  mile  for  operating  expense  as  the 
Manistee  &  North-Eastern,  but  the  operating  ex- 
pense per  unit  of  traffic  on  the  Pennsylvania  was  only 
44%  of  the  expense  on  the  Manistee  &  North-Eastern 
or  less  than  one-half  as  much. 


232 


VALUATION  AND  RATES 


In  order  to  see  what  the  rate  of  decrease  is  with, 
increasing  traffic  density,  we  may  construct  a  dia- 
gram by  platting  the  figures  of  this  table. 


882888S8S 
Total   Operating    Expense 


The  diagram  shows  that  the  operating  cost  per 
unit  of  traffic  increases  very  rapidly  when  the  num- 
ber of  traffic  units  per  mile  of  road  falls  below  1,- 


RATES  233 

750,000,  which  is  the  average  density  of  all  Class  I 
roads  in  the  United  States. 

The  operating  cost  per  unit  of  traffic  decreases 
very  slowly  when  the  number  of  traffic  units  per  mile 
exceeds  1,750,000. 

An  important  connection  between  the  facts  shown 
on  the  diagram  and  practical  rate-making  is,  that  on 
branch  and  main  lines  of  secondary  importance, 
having  a  traffic  density  less  than  the  average,  the 
rates  per  ton  and  per  passenger  mile  must  be  larger 
than  on  the  roads  having  a  greater  traffic  density 
than  the  average,  if  such  lines  are  to  earn  net  out 
of  their  revenues  in  the  same  ratio  as  lines  of  average 
or  greater  traffic  density.  This  is  a  most  important 
principle  of  rate  construction. 

Physical  Factors  Affecting  Operating  Expense 

The  actual  operating  expense  per  ton-mile  varies 
widely  with  differing  physical  characteristics.  This 
applies  particularly  to  the  condition  of  a  road  as  to 
its  controlling  grades. 

A  Mikado  engine  with  a  tractive  power  of  49,000 
pounds  can  haul  a  train  of  about  4,080  tons  up  a 
0.3%  grade.  Deducting  the  weight  of  cars  and  en- 
gine, it  can  haul  2,585  tons  of  freight.  The  same  en- 
gine will  haul  572  tons  of  freight  up  a  2%  grade. 
The  cost  of  operating  either  train  is  practically  the 
same,  but  the  cost  of  hauling  per  ton,  on  account  of 
the  grade,  is  about  4%  times  greater  on  the  stiff  2% 
than  on  the  0.3%  grade. 

The  cost  of  operating  over  curved  track  is  much 
greater  than  on  straight  track,  due  principally  to 
increased  cost  of  repairs  of  equipment.  For  each 
degree  of  curvature  it  is  usual  among  engineers  to 
estimate  that  the  annual  operating  expense  is  in- 
creased 95  cents  per  train. 

It  is  not  unusual  in  a  rough  country  to  find  50  de- 
grees of  curvature  per  mile  of  line  and  in  moun- 


234  VALUATION  AND  RATES 

tainous  country,  two  or  three  times  as  much.  The 
increase  in  operating  expense,  annually  per  mile,  on 
a  line  operating  30  trains,  with  50  degrees  of  curva- 
ture per  mile  over  that  of  straight  line  operation  is 
95  cents  by  50  degrees  by  30  trains,  or  $1,425. 

Often  freight  rates  in  one  locality  are  compared 
with  rates  in  another  on  a  ton-mile  basis.  Unless  the 
physical  factors  of  the  two  different  operations  are 
stated,  such  comparisons  are  absolutely  worthless 
and  misleading.  One  operation  may  be  conducted 
on  a  railroad  located  in  a  flat  plains  country  over 
straight  tracks  and  very  light  grades;  the  other,  on 
a  railroad  located  over  a  range  of  mountains  with  a 
very  tortuous  line  and  the  stiff  est  of  mountain  grades. 

A  comparison  of  the  operating  features  of  two 
typical  lines,  in  connection  with  the  statistics  of  ac- 
tual operation,  will  serve  to  illustrate  the  effect  of 
the  physical  factors  on  operating  expense. 

Operating    Expense — Denver    &    Rio    Grande 
v.  Virginian 

The  Denver  &  Rio  Grande  Railroad  extends  from 
Denver,  Colorado,  to  Ogden,  Utah,  with  numerous 
branches,  some  of  wjiich  reach  into  northern  New 
Mexico.  For  practically  all  of  its  length  it  is  built 
through  the  Rocky  Mountains,  the  rough  topography 
of  the  country  necessitating  much  curvature  and  stiff 
mountain  grades. 

The  Virginian  Railway  extends  from  the  seaboard 
at  Norfolk,  Virginia,  through  the  coal  fields  of  West 
Virginia,  to  within  a  few  miles  of  Charleston,  West 
Virginia.  While  for  much  of  the  distance  it  is  lo- 
cated in  the  Allegheny  Mountains,  it  has  easy  curves 
and  very  light  grades.  Its  principal  traffic  is  the 
hauling  of  coal  from  the  West  Virginia  fields  to  tide- 
water, its  traffic  in  the  opposite  direction  being  quite 
small,  comparatively. 


RATES  235 

In  consequence  the  grades  "favor  the  traffic,"  that 
is,  the  haul,  generally,  is  a  "down-hill"  haul  from 
the  mountains  to  tide-water.  The  traffic  is  compar- 
atively dense — the  freight  ton-miles  per  mile  of  line 
being  3,174,000 — which,  in  connection  with  the  ad- 
vantage of  light  grades  and  easy  curves  makes  the 
operating  condition  particularly  favorable  from  an 
economic  standpoint. 

The  following  statistics  from  the  Interstate  Com- 
merce Commission  Reports  of  1913,  show  the  effect 
of  these  differing  physical  characteristics  on  operat- 
ing expenses  and  net  earnings.  The  figures  are  con- 
fined to  freight  traffic  except  as  to  the  first  and  last 
items  : 

Denver  & 
Items.  Rio  Grande.     Virginian. 

Operating  Expenses  per  train -mile $2.067  $1.965 

Average  tons  per  train 305  1,330 

Revenue  per  ton-mile 1.04  cts  0.34  cts 

Revenue  per  train-mile $2.87  $3.409 

Average  Operating  Cost  per  Traffic  Unit..  0.96  cts  0.21  cts 

The  effect  of  the  favorable  grade  condition  is  at 
once  apparent  from  the  first  two  items  of  the  table. 
The  Virginian  hauls  4.3  times  as  much  freight  in  its 
average  train,  and  at  an  expense  of  10  cents  per 
train-mile  less.  In  spite  of  the  fact  that  the  Denver 
&  Rio  Grande  receives  a  revenue  per  ton-mile  three 
times  that  of  the  other  road,  its  revenue  per  train- 
mile  is  about  15%  less.  Taking  both  freight  and 
passenger  traffic  into  account  the  operating  expense 
per  traffic  unit  on  the  Denver  &  Rio  Grande  is  4.6 
times  greater  than  on  the  Virginian. 

This  comparison  is  between  two  roads,  one  of 
which  has  particularly  unfavorable  operating  condi- 
tions and  the  other  very  favorable  conditions,  and 
they  were  selected  for  comparison  for  that  reason. 
The  same  differences  apply  in  varying  degree  quite 


236  VALUATION  AND  RATES 

generally,  however,  in  two  broad  divisions  of  all  rail- 
roads, viz.,  the  main  trunk  lines  carrying  a  very 
heavy  traffic  and  the  branch  and  less  important  main 
lines  which  "feed"  them. 

The  increased  density  of  traffic  has  made  it  eco- 
nomical to  reconstruct  these  main  arteries  of  traffic, 
reducing  the  controlling  grades  and  improving  the 
operating  conditions  generally,  as  described  in  detail 
in  the  chapter  on  "Construction  and  Re-Construc- 
tion." In  consequence,  their  operating  expenses  are 
relatively  very  low,  not  only  on  account  of  dense 
traffic  but  are  still  further  lowered  by  the  favorable 
physical  characteristics  of  curvature  and  grades. 

Neither  of  these  favorable  conditions  apply  gen- 
erally to  other  than  these  main  trunk  lines,  and  this 
fact  should  always  be  borne  in  mind  in  considering 
rates  applying  over  main  lines  of  minor  importance, 
and  branch  lines.  What  would  be  a  fair  rate,  giving 
a  return  ample  to  cover  all  charges  and  expenses  if 
applied  to  a  busy  main  line,  might  well  be  ill-advised 
or  even  confiscatory  if  applied  to  a  line  of  lighter 
traffic  density  and  unfavorable  operating  conditions 
as  to  grade  and  curvature. 

Terminal  Expense 

The  cost  of  transportation  is  not  directly  propor- 
tional to  distance  for  several  reasons.  The  cost  of 
the  service  involves  two  factors,  viz.,  the  cost  of  haul- 
ing from  point  of  origin  to  destination  and  the  cost  of 
handling  at  both  points. 

When  either  of  the  terminal  points  is  a  large  com- 
mercial or  industrial  center,  these  terminal  charges 
(cost  of  handling)  are  a  very  considerable  percent- 
age of  the  whole  cost,  not  only  on  account  of  labor 
involved  in  the  handling  of  freight,  but  of  the  in- 
terest charges  on  the  huge  sums  of  money  invested 
in  terminal  facilities.  At  Chicago  and  New  York, 


RATES  237 

these  terminal  charges  are  generally  considered  to 
be  three  cents  per  100  pounds,  or  sixty  cents  per  ton. 

On  a  shipment  of  sixth-class  freight  between  these 
two  points,  the  charge  is  at  the  rate  of  26.3  cents 
per  100  pounds.  The  terminal  charges  of  6  cents 
are  almost  23%  of  the  whole  charge,  and  this,  too, 
when  the  haul  is  estimated  at  920  miles.  On  the 
average  haul  for  the  Central  and  Eastern  States, 
which  is  very  much  shorter,  the  terminal  cost  is  a 
very  much  larger  percentage  of  the  total  cost. 

Satistics*  in  regard  to  the  operation  of  30  freight- 
houses  showed  a  value  of  property  employed  of 
$12,000,000,  and  an  average  station  expense  of 
$166,000  per  month. 

Allowing  for  interest  and  depreciation  on  the 
value  of  the  property  employed,  the  total  cost  per 
ton  for  handling  the  freight  was : 

Cents. 

Interest  and  Depreciation 28.6 

Station  Force  and  Shifting  Cars.   41.5 

Cost  per  Ton 70.1 

The  costs  varied  from  44  cents  per  ton  for  a 
Baltimore  freight  house  to  98  cents  per  ton  for  one 
in  Chicago.  This  cost  is  simply  for  the  handling  of 
the  freight  at  the  freight  house  and  does  not  in- 
clude such  items  of  overhead  expense  as  general 
supervision  and  other  general  expense. 

These  terminal  expenses  on  that  class  of  traffic 
which  must  be  handled  through  freight  houses  are 
higher  than  on  carload  traffic  handled  on  team 
tracks,  and  the  carload  traffic  handled  directly  on 
the  industrial  tracks  costs  less  than  that  on  team 
tracks.  These  differences  in  terminal  expense  are 

*From  "Economics  of  Railway  Operation,"  by  M.  L.  Byers,  C.  E. 


238  VALUATION  AND  RATES 

reflected  in  the  rates  charged  for  various  classes 
of  service. 

It  is  not  possible  to  make  a  comparison  from 
the  Interstate  Commerce  Commission  statistics  of 
various  roads  having  different  length  of  average 
haul,  for  the  purpose  of  determining  the  net  effect 
of  distance  on  operating  expense,  as  the  cost  of  op- 
eration varies  with  the  character  of  traffic  moved, 
as  well  as  with  the  distance,  and  there  are  other 
difficulties  in  the  way  of  making  satisfactory  com- 
parisons. 

Apportionment    of    Expense    Between    Various 
Classes  of  Traffic 

It  is  not  possible  to  divide  operating  expense 
between  different  items  of  traffic  accurately.  It  is 
not  possible  to  make  a  division  even  into  the  two 
broad  classes  of  freight  and  passenger  traffic  on  all 
items  of  expense,  except  on  an  arbitrary  basis. 

An  examination  of  the  117  items  into  which  op- 
erating expense  is  divided  by  the  Interstate  Com- 
merce Commission  classification  as  given  in  a  pre- 
ceding table  will  show  that  this  is  true. 

In  the  expense  of  maintaining  the  track  (items 
2  to  6),  it  is  known  that  a  passenger  train  increases 
the  expense  of  maintenance  more,  per  ton  of  train, 
than  a  freight  train.  The  American  Railway  Engi- 
neers' Association  estimates  that  a  passenger  car 
increases  cost  of  maintenance  per  ton  of  car  twice 
as  much  as  per  ton  of  freight  car;  a  freight  engine 
twice  as  much  per  ton  as  per  ton  of  freight  car ; 
and  a  passenger  engine  four  times  as  much  per  ton 
as  per  ton  of  freight  car.  This  is  probably  as  near 
the  truth  as  it  is  possible  to  get. 

As  to  some  other  items  of  Maintenance  of  Way 
expense  the  division  must  be  made  on  an  arbitrary 
basis,  such  as  the  respective  earnings  or  train  mile- 
age of  the  freight  and  passenger  traffic. 


RATES  239 

As  to  most  items  of  Maintenance  of  Equipment,  a 
division  between  passenger  and  freight  equipment 
expenses  can  be  made,  and  as  to  Transportation  ex- 
pense, most  of  the  items  of  expense  can  be  divided 
between  passenger  and  freight  service.  There  are 
many  items,  however,  that  can  only  be  divided  by 
making  arbitrary  assumptions. 

It  is  evident  that  it  costs  a  railroad  more  to  han- 
dle and  haul  a  ton  of  silk  hats  or  millinery  than  it 
does  a  ton  of  coal,  but  when  we  come  to  investigate 
exactly  how  much  more  we  find  ourselves  unable  to 
do  so  because  a  division  of  the  117  items  of  expense 
cannot  be  made.  Some  operating  expenses  are  af- 
fected by  the  hats  that  are  not  affected  by  the  coal, 
and  vice  versa.  The  same  is  true  of  all  items  of 
traffic.** 

One  reason  why  rates  for  various  items  of  traffic 
cannot  be  made  strictly  on  the  basis  of  cost  of  serv- 
ice is,  that  an  accurate  apportionment  of  expenses 
among  the  various  items  of  traffic  is  not  possible, 
and,  therefore,  the  respective  costs  cannot  be  defi- 
nitely determined. 

Many  complications  would  be  encountered  in  ap- 
plying strictly  a  cost  of  service  basis  to  rates.  Rates 
must  be  fixed  in  advance  of  performing  the  service 
of  transportation.  We  have  seen  from  the  fore- 
going discussion  that  the  cost  per  unit  of  traffic 
varies  widely  with  its  volume.  Therefore,  it  is  only 
after  rates  are  in  effect  that  the  cost  of  service  may 
be  known. 

If  the  rate  has  been  fixed  at  $1  per  ton  on  the  as- 
sumption that  1,000  tons  are  to  move,  and  only 


**While  it  is  not  possible  to  obtain  the  cost  with  exactitude, 
for  each  item  of  traffic,  it  is  possible  to  approximate  closely  the 
relative  costs  of  broad  divisions  or  classes  of  the  traffic  as,  Prod- 
ucts of  Mines,  of  Animals,  of  Forests,  etc.,  by  a  proper  analysis 
of  the  operating  statistics  of  particular  divisions  of  a  railroad, 
when  these  are  available.  This  is  discussed  more  fully  in  the 
following  pages  of  this  chapter,  under  the  head  of  Importance  of 
Cost  Data. 


240  VALUATION  AND  RATES 

100  tons  move,  the  rate  will  be  insufficient  to  cover 
cost;  if  10,000  tons  move,  the  cost  will  be  materially 
less  and  the  rate  too  high. 

Cost    of    Service    Principles 

On  the  basis  of  these  facts  we  may  summarize  as 
follows : 

(1)  That   Capital   Charges   per   unit   of   traffic 
decrease  very  rapidly  as  traffic  increases.     Up  to  the 
point    where    the    capacity    of    the    facilities    are 
reached,  capital  charges  do  not  increase  at  all  with 
an  increase  in  volume  of  traffic. 

(2)  It  is  a  fair  statement,  as  to  average  condi- 
tions, that  at  least  34%  of  Total  Operating  Expense 
is  a  fixed  expense  which  will  be  incurred  irrespective 
of  the  volume  of  traffic. 

(3)  On  account  of  the  fixed  operating  expense, 
the  operating  cost  per  unit  of  traffic  decreases  as, 
traffic  density  increases.     Such  unit  cost  increases 
very  rapidly  as  the  traffic  density  falls  below  the 
average  for  the  whole  country;  it  decreases  slowly 
as  traffic  density  rises  above  the  average.    See  dia- 
gram "Operating  Cost  per  Traffic  Unit,"  page  232. 

(4)  That  as  operating  cost  can  not  be   accu- 
rately apportioned  among  different  items  of  traffic, 
it  is  not  possible  to  make  rates  which  are  based 
strictly  on  cost  of  service. 

(5)  That  cost  of  service  can  not  be  known  in 
advance  of  the  actual  transportation  of  any  par- 
ticular item  of  traffic,  as  such  cost  depends  on  the 
volume  of  traffic  moved.     It  is  only  after  the  rate 
has  been  made  that  the  volume  of  the  traffic  can 
be  known. 

Application   of   Principles 

In   some    situations    cost   of   service    may   mean 
either  one  of  two  possible  costs,  viz.,   (1)   A  cost 


RATES  241 

which  includes  a  full  proportion  of  the  fixed  in- 
terest charges  and  total  operating  expense;  (2)  or 
the  additional  cost  which  the  transportation  would 
add  to  existing  total  operating  expense. 

Suppose  a  road  which  had  not  previously  car- 
ried a  certain  class  of  traffic  were  called  upon  to 
make  a  rate  for  performing  such  a  service.  Must 
it  charge  a  rate  made  up  of  a  percentage  of  fixed 
charges  and  operating  expenses  apportioned  on  the 
relation  which  the  proposed  tonnage  bears  to  the 
total  tonnage  carried,  or,  inasmuch  as  fixed  charges 
on  capital  and  34%  of  operating  expense  remain 
the  same  whether  the  service  is  performed  or  not, 
is  the  cost  to  be  taken  as  the  additional  cost  of  per- 
forming the  service? 

Let  us  take  for  illustration  an  actual  case  where 
the  proposed  addition  of  traffic  was  large  and  con- 
stituted an  important  part  of  the  traffic  of  the  road. 

The  Cairo  division  of  the  C.  C.  C.  &  St.  L.  Ry. 
traverses  the  coal  fields  of  Southern  Illinois.  Prior 
to  the  reconstruction  of  its  line  and  the  construc- 
tion of  the  Chicago,  Indiana  &  Southern  (which  is 
under  the  same  control)  from  Danville  to  Chicago, 
it  hauled  no  coal  from  these  fields  into  Chicago. 
After  the  construction  work  had  been  completed, 
it  entered  the  coal  carrying  business  into  Chicago. 
The  tonnage  of  this  coal  business  is  very  large  in 
the  aggregate — being  measured  by  trains. 

The  distance  from  the  Harrisburg  mines  to  Chi- 
cago is  320  miles;  on  the  reconstructed  lines  the 
grades  are  light,**  which  permits  the  hauling  of 
long  trains  economically. 

The  established  rate  on  coal  by  other  lines  be- 
tween the  same  coal  fields  and  Chicago  was  $1  per 
ton,  which  with  the  distance  of  320  miles  gave  a 
revenue  of  0.312  cents  per  ton-mile.  The  average 


** Ratio  of  vertical  rise  to  horizontal  distance  small. 


242  VALUATION  AND  RATES 

revenue  for  the  whole  C.  C.  C.  &  St.  L.  Railway 
System  was  0.543  cents  per  ton-mile,  in  1914. 

The  average  cost  per  ton-mile  of  freight  (esti- 
mated by  assuming  that  the  total  operating  ex- 
pense should  be  divided  on  the  basis  of  freight  and 
passenger  earnings)  was  0.394  cents  per  ton-mile. 
Apportioning  the  fixed  charge — interest  and  rentals 
— on  the  same  basis,  gave  0.093  cents  per  ton-mile 
for  this  item.  The  total  cost  then  was  0.394  cents 
operating  expense  plus  0.093  cents  fixed  charge, 
which  equaled  0.487  cent  per  ton-mile. 

That  is,  if  the  full  proportion  of  fixed  interest 
charge  and  of  total  operating  expense  were  charged 
against  the  traffic,  on  the  basis  of  tonnage,  the  cost 
of  performing  the  service  would  exceed  the  rev- 
enue by: 

Cost 0.487  cents 

Revenue 0.312  cents 

Loss   0.175  cents 

On  the  320-mile  haul  there  would  be,  on  this 
basis  of  estimating,  a  loss  of  56  cents  on  every  ton 
hauled. 

But  this  method  of  estimating  cost  does  not  take 
into  account  two  important  related  facts,  viz.,  the 
0.093  cents  per  ton-mile  for  fixed  interest  and  rental 
charges  and  34%  of  the  total  operating  expense — 
the  Fixed  Operating  Expense — had  to  be  paid 
whether  the  coal  was  carried  or  not. 

If  only  the  additional  cost  of  hauling  the  coal  was 
considered,  the  cost  per  ton-mile  was  0.260  cents — 
that  is  66%  of  the  total  operating  expense,  which 
was  0.394  cents  per  ton-mile.  On  this  basis,  there 
was  a  profit**  of  16.64  cents  per  ton  of  coal  hauled, 
thus: 


**This  illustration  is  used  only  for  the  purpose  of  showing  two 
possible  methods  of  estimating-  cost.     It  must  not  be  regarded  as 


RATES  243 

Revenue  per  ton-mile 0.312  cents 

Actual  additional  cost 0.260  cents 

Profit  per  ton-mile 0.052  cents 

0.052  cents  profit  per  ton-mile  x  320  miles= 16.64 
cents  per  ton  profit. 

Equal  Mileage  Rates 

Equal  mileage  rates,  if  applied  to  all  commodities 
alike,  would  have  no  relation  whatever  to  cost  of 
service.  Each  item  of  traffic  has  its  own  cost,  re- 
sulting from  the  conditions  attending  its  transporta- 
tion. When  all  factors  entering  into  the  cost  are 
taken  into  account,  it  costs  more  to  move  a  ton  of 
fresh  meat  1,000  miles  than  it  does  to  move  a  fon 
of  salt — as  usually  shipped — the  same  distance. 

For  any  given  commodity,  equal  rates  for  equal 
distances  in  all  cases  would  not  be  based  on  cost  of 
service.  That  is,  it  may  cost  more  to  haul  a  ton  of 
lumber  100  miles  on  one  road,  or  under  certain  com- 
mercial conditions,  than  it  does  to  haul  a  ton  of 
lumber  100  miles  on  another  road,  or  under  other 
commercial  conditions. 

There  are  two  objections  to  a  system  of  rates  based 
on  equal  rates  for  equal  mileages  for  a  given  com- 
modity, viz ;  Physical  and  Commercial.  To  illustrate 
the  Physical: 

The  statistics  of  the  relative  operating  cost  on 
the  Virginian  Railway  and  the  Denver  &  Rio 
Grande,  heretofore  given,  show  that  the  average 
cost  of  transportation  per  unit  of  traffic  is  4.6  times 

showing  the  actual  cost  of  hauling  coal.  What  the  illustration 
indicates  is,  that  if  the  operating  cost  of  moving  the  coal  per 
ton-mile  is  the  same  as  the  average  cost  per  ton-mile  for  moving 
all  commodities,  the  actual  out-of-pocket-expense  incurred  in 
moving  it  is  not  greater  than  that  shown.  The  interest  on  the 
cost  and  depreciation  of  the  additional  equipment,  which  would 
be  required  for  such  a  large  addition  to  traffic  as  that  assumed, 
would  of  course  have  to  be  deducted  from  the  net  profit  shown. 


244  VALUATION  AND  RATES 

greater  on  the  one  than  the  other.  Equal  mileage 
rates  applied  to  those  two  roads  would  evidently 
bear  no  relation  to  cost  of  service. 

These  differences  in  practical  operating  conditions 
are  not  confined  to  comparisons  between  lines  lo- 
cated in  greater  part  in  a  coastal  plain  and  lines  in 
mountainous  regions.  They  exist  very  generally  in 
all  parts  of  the  country. 

The  Paducah  Division  of  the  Illinois  Central  Rail- 
road crosses  the  Ozark  Hills  in  Southern  Illinois.  Its 
grades  are  steep  and  the  traffic  of  the  line  is  light, 
consisting  principally  of  ties,  piles,  poles,  and  some 
coal.  Its  maximum  train  consists  of  twelve  loaded 
cars  with  a  total  lading  of  about  300  tons  or  less.  At 
the  steepest  grade  on  the  line  the  train  is  broken  up, 
only  six  cars  being  taken  over  this  grade  at  one  time, 
the  engine  returning  for  the  remaining  six  cars. 

The  Virginian  Railway  operating  between  the 
West  Virginia  coal  fields  and  the  Atlantic  ports  car- 
ries an  average  of  1,330  tons  per  train.  Evidently 
equal  mileage  rates,  that  is,  the  same  rates  per  ton 
per  mile  for  hauling  coal  on  the  two  roads,  would 
not  be  equitable. 

The  generally  accepted  view  that  certain  rates  for 
transporting  any  given  commodity  on  one  line  as 
compared  with  rates  on  the  same  commodity  carried 
over  other  lines,  where  the  mileage  is  the  same  and 
the  rates  higher  are  in  consequence  unfair,  fails  to 
take  into  account  the  wide  differences  in  the  physical 
characteristics  of  two  roads,  particularly  as  to 
grades. 

As  to  the  commercial  feature,  statistics  heretofore 
shown,  and  the  discussion  following  them,  clearly  in- 
dicate that  fixed  charges  and  fixed  expenses  are 
distributed  over  a  greater  volume  of  traffic  on  busy 
trunk  lines  than  on  branch  or  main  lines  of  secondary 
importance.  To  base  the  rate  on  the  mileage,  using 


RATES  245 

the  same  figure  per  ton-mile  when  hauled  over  a 
line  of  light  traffic,  where  the  cost  per  unit  of  traffic 
is  high,  as  when  hauled  over  a  line  of  maximum 
traffic  density,  where  the  cost  per  unit  of  traffic  is 
low,  would  place  the  rates  on  anything  but  a  cost  of 
service  basis. 

The  "Chicago,  Burlington  &  Quincy  Railroad  be- 
tween Alliance,  Nebr.,  and  Sheridan,  Wyo.,  330 
miles,  traverses  a  barren  country  very  thinly  settled, 
with  no  cities  and  no  industry  of  importance  on  its 
line;  between  Chicago  and  Charlton,  Iowa,  334 
miles,  its  line  is  crowded  with  trains,  as  it  passes 
through  a  rich  agricultural  and  manufacturing  dis- 
trict, producing  much  traffic  and  in  addition  carries 
a  very  large  through  business  to  points  beyond  in 
both  directions.  Evidently  if  the  rate  for  hauling  a 
ton  of  merchandise  from  Charlton  to  Chicago  were 
applied  to  a  ton  of  merchandise  hauled  from  Alliance 
to  Sheridan  it  would  not  be  on  a  cost  of  service  basis 
although  the  distances  are  practically  the  same. 

It  is  hardly  necessary  to  state  that  rates  on  a 
wholesale  business  may  with  justice  be  lower  per 
unit  of  traffic  than  on  retail  business,  as  the  cost  of 
doing  business  is  less.  The  principle  finds  universal 
application  in  the  commercial  world.  The  purchaser 
who  buys  coal  by  the  car  pays  less  per  pound  than 
the  one  who  buys  by  the  bag;  the  lawyer  pays  more 
for  his  paper  bought  by  the  ream  than  the  printer 
who  buys  by  the  ton,  although  both  the  coal  and  the 
paper  are  of  identical  character  in  each  case. 

Finally,  rates  much  lower  than  normal  rates  may 
be  exceptionally  profitable  on  particular  commodities 
(as  shown  by  the  example  of  the  Cleveland,  Cincin- 
nati, Chicago  &  St.  Louis)  without  doing  injustice  to 
other  commodities  paying  normal  rates. 

Speaking  generally,  rates  must  be  based  on  the 
mileage,  and  they  are  so  based  usually.  However,  an 


246  VALUATION  AND  KATES 

examination  of  rate  tariffs  shows  in  some  instances 
that  on  the  same  articles  for  the  same  distance,  over 
the  same  rails,  the  rates  compared  with  each  other 
are  as  7  mills  per  ton-mile  is  to  10  mills  per  ton-mile. 
Taken  in  connection  with  the  statement  that  gen- 
erally speaking  rates  are  based  on  mileage,  such 
rates  need  explanation  and  the  basis  on  which  they 
have  actually  been  fixed  must  be  studied  more 
closely. 

The  present  rate  structure  is  the  result  of  econom- 
ical development  and  commercial  progress;  an 
adapting  of  rates  to  changing  business  conditions 
and  to  competition  with  other  forms  of  transporta- 
tion; an  adjustment  between  commodities  and  com- 
munities, between  wholesale  and  retail  business,  be- 
tween long  hauls  and  short  hauls. 

It  could  not  have  been  constructed  at  the  begin- 
ning of  the  railroad  era.  To  understand  it,  a  study 
of  its  historical  development  is  necessary. 

Historical  Development  of  Rates 
English 

The  first  railways  were  built  in  England  to  carry 
coal  and  other  mine  products;  these  carried  neither 
merchandise  nor  passengers.  The  first  passenger 
line  was  opened  for  traffic  in  1830  and  although 
promoted  to  carry  freight,  the  passenger  crowded 
the  freight  traffic  from  the  line  for  some  years. 

In  1842,  after  other  lines  had  been  constructed, 
the  average  earnings  consisted  of  75%  from  passen- 
ger and  25%  from  freight  traffic;  on  the  main  trunk 
lines  only  15%  of  the  total  was  derived  from  freight 
traffic.  In  the  early  fifties  the  earnings  were  divided 
51%  freight,  43%  passenger  and  6%  from  other 
sources. 

The  first  passenger  traffic  represented  customers 
taken  from  the  stage  coaches.  They  paid  railroad 
fares  averaging  4  cents  per  mile,  first  class;  in  the 


RATES  247 

beginning,  the  third  class  passenger  traffic  was  in- 
significant. The  number  of  passengers  carried  in 
1842  was  eighteen  million.  In  1902,  the  passengers 
carried  were  one  and  one-half  billion,  at  an  average 
fare  of  1  cent  per  mile — one-fourth  of  the  original 
fare.  Nearly  90%  traveled  third  class  and  about 
one  hundred  and  eighty  million  traveled  first  class. 

The  first  class  traffic  had  therefore  increased  to 
ten  times  the  volume  of  the  1842  traffic,  but  the  rate 
had  remained  practically  the  same;  the  low  third 
class  fares  had  developed  a  traffic  which  did  not 
exist  at  all  during  the  early  days  of  operation. 

In  view  of  the  greater  economy,  convenience, 
safety  and  speed  of  railroad  travel,  it  was  inevitable 
that  all  of  the  then  existing  passenger  business 
should  come  at  once  to  the  railroads.  As  canals  and 
coasting  vessels  were  available  for  cheap  transporta- 
tion, freight  traffic  was  a  different  proposition. 
Further,  the  first  locomotives  were  small  and  inef- 
ficient, the  expenses  large  for  operating  them  and 
the  tracks  of  the  railroad  were  fully  employed  by 
the  passenger  traffic.  Under  these  conditions  there 
was  no  motive  for  attempting  to  attract  freight 
traffic  from  the  cheaper  existing  facilities  of  trans- 
portation. 

As  the  number  of  lines  increased,  competition  be- 
tween the  various  companies  necessitated  the  con- 
struction of  branch  and  other  lines  to  occupy  the 
territory  tributary  to  their  main  lines.  Such  lines 
necessarily  had  less  traffic  density  than  the  main 
lines  and  the  new  capital  needed  new  business  over 
which  to  spread  increased  capital  charges. 

To  attract  the  existing  traffic  from  canals,  sea 
vessels  and  other  routes  and  that  class  of  traffic  that 
could  not  otherwise  move  at  all,  the  rates  on  freight 
traffic  were  reduced. 

The  freight  traffic  of  these  railroads  began  with 
a  small  volume  of  high  class  traffic  carried  at  high 


248  VALUATION  AND  RATES 

rates  and  was  taken  principally  from  the  stage  lines. 
The  constant  tendency  has  been  to  increase  the 
volume  of  traffic  by  lower  rates,  taking  lower  classes 
of  traffic  successively. 

The  increase  in  volume  has  come  from  previously 
existing  systems  of  transportation — as  turnpike, 
canal  and  the  sea — and  from  newly  created  traffic 
which  the  railroad  itself  has  made  possible.  As  the 
traffic  increased,  the  rates  have  come  down  and  the 
lower  rates  have  in  turn  operated  to  further  increase 
the  traffic.  The  process  has  been  continued  to  the 
point  where  the  railroads  have  got  all  the  traffic 
they  can  afford  to  take — that  is,  when  the  cost  of 
handling  the  lowest  class  of  traffic  is  but  little  less 
than  the  earnings  from  it.* 

Development  of  American  Rates 

The  experience  of  the  English  roads  has  been  re- 
peated in  the  United  States  and  the  development 
has  been  generally  along  the  same  lines.  The  freight 
traffic  is  much  the  more  important  part  of  the  whole 
traffic  in  the  United  States,  while  it  is  of  practically 
equal  importance  on  English  railroads. 

In  1826  Josiah  Quincy,  as  related  in  his  diary, 
traveled  from  Boston  to  Washington  by  stage,  the 
trip  requiring  eight  days. 

In  1832,  at  the  beginning  of  the  era  of  railroad 
construction,  the  stage  coaches  made  the  trip  from 
New  York  to  Boston,  195  miles,  with  no  stops  for 
rest,  in  41  hours  and  charged  a  fare  of  $11.00.  The 
trip  could  be  made  by  steamer  from  New  York  to 
Providence  in  1822  in  23  hours  and  thence  by  stage 
to  Boston,  44  miles,  in  5  hours,  the  fare  for  the  stage 

*The  historical  facts  contained  in  the  foregoing  recital  of  Eng- 
lish railroad  development  are  based  on  information  taken  from 
"The  Elements  of  Railway  Economics,"  by  W.  M.  Acworth,  Clar- 
endon Press,  Oxford,  1905. 


RATES  249 

journey  being  $3.00.  There  were  as  many  as  twenty- 
five  stage  coaches  running  daily  between  these  two 
latter  points. 

In  1836  the  stage  journey  between  New  York  and 
Philadelphia,  92  miles,  consumed  14  hours  and  the 
fare  was  $6.00.  In  1831  the  stage  journey  between 
Philadelphia  and  Pittsburgh  (348  miles  by  rail), 
could  be  made  by  the  fastest  mail  stages  in  two  and 
one-half  days,  by  the  ordinary  passenger  stages  in 
four  days.  In  1837  the  stage  journey  between  Pitts- 
burgh and  Erie,  Pa.,  stage  distance  128  miles,  re- 
quired 46  hours  without  rest  for  sleep. 

In  the  earlier  period,  between  1820  and  1830,  it 
required  more  than  three  weeks  to  travel  from  New 
York  to  St.  Louis,  six  days  from  Cincinnati  and  four 
and  one-half  days  from  Louisville.  During  the  war 
of  1812,  when  the  Atlantic  ports  were  blockaded  by 
the  British  Navy,  the  cost  of  transporting  goods  from 
Boston  to  Charleston,  S.  C.,  by  wagons,  was  40  cents 
a  pound  or  $800  per  ton.** 

It  is  hardly  necessary  to  state  that  under  the  con- 
dition existing  at  the  time,  the  new  railroads,  very 
soon  after  their  opening,  drew  all  of  the  traffic  from 
the  stage  coaches  and  wagons  with  which  they  com- 
peted. The  last  of  the  stages  disappeared  in  1850 
as  a  consequence  of  railroad  competition. 

Railroad  Competition  with  Erie  Canal 

The  competition  of  the  railroads  with  the  canals, 
the  most  efficient  existing  means  of  transportation 
when  railroad  construction  began,  is  illustrated  by 
the  rate  history  of  the  New  York  Central  Railroad 
and  the  Erie  Canal,  with  which  it  competed  for 
freight  traffic  between  the  Seaboard  and  the  Great 
Lakes. 


** These  historical  facts  are  taken  from  a  paper  by  Mr.  Sey- 
mour Dunbar,  appearing  in  the  "Railway  Library"  for  1914. 


250  VALUATION  AND  RATES 

The  Erie  Canal,  completed  in  1825,  connects  the 
Hudson  River  with  Lake  Erie  at  Buffalo.  The  New 
York  Central  Railroad  practically  parallels  the  Hud- 
son River  and  the  Erie  Canal  for  the  whole  distance. 
It  was  completed  in  1842,  though  at  that  time  it  was 
owned  by  fourteen  independent  companies.  In  1853, 
Vanderbilt  bought  up  these  independent  companies, 
amalgamating  their  separate  holdings  into  one  sys- 
tem, whose  length  from  New  York  to  Buffalo  was 
438  miles. 

Between  1825  and  1853,  the  canal  rates  were  re- 
duced so  that  the  tolls  in  effect  were  only  about  one- 
third  of  the  original  charges.  Even  with  this  very 
radical  reduction  in  rates,  the  canal  paid  the  State 
of  New  York,  which  owned  it,  an  annual  profit  of 
50%  on  its  original  capital. 

To  draw  the  freight  traffic  from  the  canal,  the 
railroad  put  in  low  rates.  The  traffic  came  with  the 
lowered  rate,  and  as  the  expenses  and  charges  were 
spread  over  a  greater  volume  of  traffic,  reduced  the 
unit  cost ;  rates  were  again  reduced  and  traffic  there- 
by further  increased. 

This  reciprocal  process  went  on  until  the  canal 
traffic  practically  disappeared,  although  in  the  mean- 
time the  State  had  abolished  all  tolls  and  assumed 
all  cost  of  maintenance  of  the  canal  to  encourage 
canal  traffic.  The  State  is  now  expending  more  than 
one  hundred  million  dollars  in  enlarging  the  canal, 
in  the  hope  of  restoring  competition  between  rail 
and  water  carriers. 

The  railroad  however  is  moving  a  traffic  which  is 
much  greater  than  the  old  canal  could  have  moved, 
and  the  average  rate  for  moving  it  is  less  than  20% 
of  the  original  rates. 

The  effect  of  these  low  rates  on  the  grain  states 
of  the  middle  West  has  been  enormous,  in  shortening 
the  time  required  for  their  development. 


RATES  251 

Rates    Reduced    to    Stimulate    Traffic 

It  is  to  be  noted,  however,  both  as  to  English  and 
American  rates,  that  while  the  average  rate  has 
come  down,  by  reason  of  the  lower  class  of  com- 
modities which  have  been  added  to  the  volume  of 
traffic  from  time  to  time,  the  rates  on  high  class 
traffic  have  not  decreased  in  proportion,  and  not  at 
all  in  some  instances.  It  is  probable  that  rates  on 
millinery,  silks,  clocks,  imported  cigars  and  like 
commodities  are  quite  as  high  now  as  they  ever  were. 

The  reduction  from  original  rates  were  made  to 
stimulate  traffic.  A  low  rate  on  limestone,  ore,  sand 
or  coal,  or  a  low  passenger  fare,  has  been  made  on 
the  principle  that  there  will  be  a  greater  net  profit 
on  a  large  business  done  on  a  small  margin,  than  on 
a  small  business  done  on  a  large  margin,  or  of  no 
business  at  all,  as  to  some  commodities. 

There  are  some  classes  of  traffic  which  are  not 
stimulated  by  low  rates;  no  amount  of  practicable 
reduction  would  increase  their  consumption,  and  in 
consequence,  the  amount  of  traffic  to  be  moved  on 
account  of  them. 

A  reduction  in  the  rate  on  shoes  from  Boston  to 
Kansas  City  would  not  cause  one  more  pair  of  shoes 
to  be  sold  there.  The  whole  rate  is  an  insignificant 
percentage  of  the  retail  value  of  the  shoes.  Low 
rates  on  packing  house  products  from  Kansas  City 
to  Boston,  however,  have  enabled  the  packers  to 
widen  their  markets,  to  sell  more  of  their  products, 
and  hence  to  increase  the  volume  of  railroad  traffic. 
The  rates  on  such  products,  when  moved  long 
distances,  are  a  considerable  percentage  of  their  sell- 
ing price. 

A  reduction  of  10  cents  per  ton  in  a  coal  rate  will 
enable  the  miner  to  ship  coal  perhaps  30  miles 
further  in  every  direction  from  his  mine.  His  trib- 
utary area — market — will  thereby  be  greatly  in- 


252  VALUATION  AND  RATES 

creased,  and  in  consequence  the  volume  of  railroad 
traffic. 

A  railroad  is  justified  in  reducing  the  rates  when 
the  traffic  will  be  stimulated  thereby,  but  it  is  not 
when  the  reduction  serves  to  reduce  its  revenue  per 
unit  of  traffic,  without  any  corresponding  increase  in 
the  volume. 

Reduction  in  the  rates  on  high  class  traffic  have 
only  been  made  to  meet  competition.  While  the  rate 
may  be  an  insignificant  portion  of  the  value  of  the 
commodity,  and  the  shipper  able  to  pay  a  larger 
rate,  he  ,will  pay  no  more  than  he  must.  If  the  rate 
from  Boston  to  Seattle  on  iron  and  steel  articles, 
when  shipped  by  vessel  through  the  Panama  Canal 
is  only  75%  of  that  charged  when  shipped  over  a 
railroad,  a  large  part  of  the  business  will  go  through 
the  Canal.  If  the  railroads  move  the  traffic,  their 
charge  can  only  be  the  rate  via  the  Canal  plus  what- 
ever the  additional  safety,  speed  and  regular  service 
of  the  railroad  is  worth  to  the  shipper. 

Summary    of    Historical    Development 

The  historical  development  of  rates  may  be  sum- 
marized by  saying,  that  the  highest  rates  now  cur- 
rent were  made  in  the  early  history  of  railroads  and 
apply  on  traffic  taken  away  from  the  stage  coaches. 
That  by  repeated  reductions  in  rates  the  railways 
have  acquired  traffic:  (1)  From  undeveloped  terri- 
tories and  from  districts  distant  from  their  markets. 
The  grain  traffic  from  the  undeveloped  territories  of 
the  Middle  West  and  Northwestern  States  to  the  At- 
lantic seaports,  is  an  excellent  example  of  this  class 
of  business. 

(2)  In  commodities  of  lowest  commercial  value. 
The  traffic  in  such  commodities  as  coal,  ore,  lime- 
stone, sand  and  ice,  is  one  created  entirely  by  the 
railroads.  Before  the  railroad  era,  coal  was  used 


RATES  253 

only  at  the  shaft  or  in  favorable  situations  where  its 
transportation  by  water  was  possible. 

(3)  In  competition  with  existing  systems  of 
transportation.  The  New  York  Central  Railroad  and 
Erie  Canal  is  an  illustration  of  this  class  of  traffic. 

The  principles  upon  which  this  traffic  has  been 
acquired  are : 

(1)  That  the  greater  the  volume  of  traffic,  the 
less  the  cost  per  unit  to  transport  it,  therefore  reduc- 
tions in  rates  which  increase  traffic  are  warranted. 

(2)  That  the  rates  for  any  class  of  traffic  must 
not  be  so  high  as  to  stop  it  from  moving,  EXCEPT, 
that  the  rate  shall  never  be  so  low  that  it  does  not 
cover  the  additional  cost  incurred  in  dealing  with  the 
particular  traffic  under  consideration. 

In  regard  to  the  first  principle,  a  rate  which  would 
not  be  profitable  on  an  existing  volume  of  1,000  tons 
of  traffic  might  be  very  remunerative  on  10,000  tons. 

The  second  principle  sets  the  limit  for  the  highest 
and  lowest  rates.  The  maximum  rate  is  fixed  by  the 
ability  of  the  commodity  to  pay  and  the  minimum 
by  the  actual  out-of-pocket  expense  incurred  in  per- 
forming the  transportation,  plus  the  smallest  of 
profits. 

In  the  application  of  these  principles  to  a  schedule 
of  rates,  consideration  must  be  given  to  the  rela- 
tion of  the  rates  charged  on  articles  competing  with 
or  which  may  be  substituted  for  each  other ;  that  the 
rate  per  mile  must  decrease  as  the  distance  increases 
and  that  the  rates  per  ton  must  decrease  as  the 
weight  of  shipment  increases. 

Rate-Making    Not    an    Exact    Science 

To  the  most  superficial  observer,  however,  it  is  ap- 
parent from  a  reading  of  the  historical  development 
of  rates  or  from  a  study  of  the  principles  upon  which 
the  rate  structure  has  been  based,  that  it  is  not  pos- 


254  VALUATION  AND  RATES 

sible  to  say  that  any  particular  rate  is  in  itself  rea- 
sonable— that  is  that  100  cents  per  ton  is  the  exact 
amount  that  should  be  charged  for  hauling  a  ton  320 
miles  and  prove  that  99  cents  or  101  cents  is  not  as 
fair  as  the  100  cents  charged. 

Any  rate  is  the  resultant  of  many  different  causes 
and  considerations;  cost  of  service,  value  of  service, 
competition  between  transportation  systems,  adjust- 
ment with  rates  on  other  articles  with  which  it  com- 
petes and  many  other  things. 

Establishing  a  schedule  of  railroad  rates,  like  fix- 
ing rates  of  taxation,  requires  a  method  combining 
both  art  and  science.  The  exact  values  to  be  attached 
to  some  factors  having  a  most  important  bearing  on 
rates,  are  not  susceptible  of  definite  mathematical 
analysis. 

Importance  of  Cost  Data 

It  must  be  remembered  in  connection  with  the 
foregoing,  that  while  the  exact  cost  of  service  can 
not  be  stated  with  scientific  accuracy,  it  is  entirely 
possible  to  do  much  better  than  merely  guess  at 
what  the  costs  of  carriage  as  to  certain  commodities 
actually  are. 

In  estimating  the  cost  of  production  of  any  plant, 
whether  it  be  an  industrial  or  a  transportation  plant, 
in  which  more  than  a  single  article  is  manufac- 
tured or  over  which  more  than  one  class  of  traffic 
is  carried,  it  is  necessary  to  make  a  division  of  that 
portion  of  total  expenditure  which  applies  to  the 
operation  of  the  plant  as  a  whole  and  which  can  not 
be  divided  among  the  various  articles  produced  or 
commodities  carried,  specifically — such  items  as  in- 
terest on  invested  capital,  overhead  charges,  super- 
intendence and  general  expenses  are  the  ones  re- 
ferred to. 

In  making  a  division  of  such  expenses  among  the 
articles  produced  or  transported,  it  is  obvious  that 


RATES  255 

some  basis,  which  will  be  more  or  less  arbitrary, 
must  be  used.  While  such  a  basis  must  of  necessity 
be  arbitrary  and  hence  not  susceptible  of  a  strictly 
scientific  analysis,  it  may  still  be  substantially  ac- 
curate and  sufficient  for  practical  purposes,  if  intelli- 
gently applied. 

Analogy  Between  Railroads'  and  Packers'  Cost 

Transportation  costs  are  not  essentially  different 
from  those  of  most  other  lines  of  business  in  which 
more  than  one  article  of  commerce  is  produced.  The 
packer  buys  a  steer  at  a  certain  price  per  pound  on 
the  hoof,  but  that  is  the  only  cost  of  his  manufac- 
tured product  that  he  may  state  with  accuracy. 

The  products  manufactured  from  the  steer  are, 
meats  of  various  classification,  hide  for  leather, 
horns  and  bones  for  buttons,  hair,  soap,  fertilizer 
and  numerous  other  commodities.  The  packer  can 
not  say  exactly  what  part  of  the  cost  of  the  steer 
is  to  be  apportioned  to  the  meat  and  what  part  to 
the  hide,  bones  or  soap. 

When  he  comes  to  place  a  selling  price  on  the 
various  commodities  produced  from  the  steer,  how- 
ever, he  must  apportion  its  cost  among  them  all,  if 
he  is  to  know  even  approximately  what  it  has  cost 
him  to  produce  the  commodities  which  he  sells. 

The  fact  that  his  business,  primarily,  is  that  of 
producing  meat,  and  that  these  other  commodities 
are  by-products,  does  not  relieve  him  of  this  neces- 
sity for  apportioning  cost.  Railroads  were  con- 
structed, primarily,  to  carry  passengers  and  high 
class  freight  which  had  been  previously  carried  by 
stage  coaches.  The  carrying  of  other  commodities 
in  the  beginning  was,  in  a  way,  a  by-product  of 
transportation,  which  has  since  become  much  the 
larger  part  of  the  business. 


256  VALUATION  AND  RATES 

Engineers'  Method  of  Analysis  Applied  to  Traffic 

Railroad  engineers,  charged  with  the  maintenance 
of  operated  roads  and  the  construction  of  new  and 
reconstruction  of  old  ones,  have  analyzed  operating 
expenses  for  the  purpose  of  ascertaining  what  effect 
such  physical  factors  as  distance,  curvature  and 
grades  have  on  such  expenses. 

All  that  is  claimed  by  them  for  their  method  of 
analysis  is,  that  it  shows  that  the  effect  of  certain 
changes  in  the  physical  operating  conditions  of  a 
road  will  reduce  operating  expense  by  an  amount 
not  less  than  a  certain  stated  minimum  and  not  more 
than  a  certain  stated  maximum,  the  actual  reduction 
being  certainly  between  the  maximum  and  the  min- 
imum, however. 

For  all  practical  purposes  this  method  of  analysis 
works  very  well,  and  the  values  for  the  various  phy- 
sical factors  mentioned  are  universally  used  in 
American  railway  practice,  in  determining  the  ad- 
visability of  reconstructing  older  roads  and  in  com- 
paring the  desirability  of  adopting  any  one  of  vari- 
ous possible  lines  in  the  construction  of  new  roads. 
The  decisions  based  on  these  analyses,  involve  the 
expenditure  of  millions  of  dollars  annually. 

The  analyses  of  the  engineers  apply  to  the  phy- 
sical factors  of  operation  and  not  to  traffic.  There  is 
no  good  reason,  however,  why  analysis  of  operating 
expense  along  the  same  general  line  should  not  be 
used  to  ascertain  certain  cost  factors  which  apply  to 
various  classes  of  traffic.  To  develop  such  factors 
will  require  special  study  and  analysis  of  operating 
expense  statistics  as  at  present  classified  and,  in  ad- 
dition perhaps,  the  making  of  a  further  division  or 
other  classification  of  operating  expense  with  par- 
ticular reference  to  traffic  conditions. 


RATES  257 

Relative  Cost  of  Certain  Commodities 

Evidently  the  task  of  ascertaining  cost  factors, 
separately,  for  each  commodity  transported,  is  too 
large  to  be  practicable,  but  those  applying  to  certain 
general  divisions  of  traffic  as,  Products  of  Mines;  of 
Forests;  of  Animals;  of  Manufactures  and  Farms, 
or  to  particular  commodities  such  as  Grain,  Coal  and 
Live  Stock,  may  be  determined,  within  reasonable 
limits,  without  an  unreasonable  amount  of  labor  or 
expense. 

The  relative  costs  of  handling  traffic  through 
freight  houses  and  on  team  and  industrial  tracks 
may  certainly  be  studied  further  with  profit. 

Relative  Cost  on  Main  and  Branch  Lines 

The  relative  cost  of  transportation  on  branch  and 
secondary  main  lines,  on  the  one  hand,  and  on  main 
lines  of  maximum  traffic  density,  on  the  other,  is 
one  particular  feature  that  certainly  needs  investi- 
gation. The  low  rates  now  charged  for  transpor- 
tation service  over  lines  carrying  light  traffic,  must 
in  many  instances  be  below  cost  of  service. 

The  fact  that  under  present  conditions  short  local 
lines  can  be  profitably  operated  only  under  excep- 
tionally favorable  circumstances,  warrants  the  sus- 
picion that  many  such  lines  which  are  part  of  the 
larger  systems  are  operated  at  a  loss. 

If  this  is  true,  it  can  be  shown  by  a  proper  analysis 
of  existing  operating  records — or  the  necessary  sta- 
tistics may  be  obtained — and  on  a  proper  presenta- 
tion of  them  these  confiscatory  rates  can  be  elim- 
inated. 

Operating  Expense   Not  Heretofore  Analyzed  in 
Relation  to  Traffic 

In  this  connection,  attention  is  directed  to  the 
fact  that  operating  expenses  have  heretofore  been 


258  VALUATION  AND  RATES 

classified  and  studied  for  the  purpose  of  maintaining 
operating  efficiency  with  the  minimum  possible  ex- 
penditure. Meantime  the  rates  charged  for  trans- 
portation have  been  radically  reduced.  In  making 
such  reductions,  traffic  officials  have  had  no  accurate 
data  to  guide  them.  It  is  conceivable  that  under 
these  conditions,  some  rates  may  have  been,  un- 
knowingly, reduced  below  the  actual  cost  of  per- 
forming the  service  for  which  the  rate  is  charged — 
in  fact  is  would  be  strange  indeed  if  this  had  not 
happened  in  many  instances. 

Commercial,  Legal  and  Economical  Factors  of  Rates 

Determination  of  the  proper  rate  involves  the 
consideration  of  three  classes  of  factors,  viz :  Com- 
mercial, Legal  and  Economical. 

The  traffic  official  will  consider  the  rate  from  a 
commercial  point  of  view,  adjusting  it  to  the  needs 
of  the  shippers. 

The  lawyer  will  investigate  to  determine  whether 
or  not  the  rate  so  established  discriminates  between 
various  classes  of  shippers  or  between  shippers  in 
various  localities. 

Neither  of  them,  however,  have  had  any  training 
or  experience  as  a  basis  on  which  to  form  a  judg- 
ment as  to  whether  the  rate  is  properly  adjusted  to 
cost  of  service,  which  is  an  economical  problem 
whose  solution  would  seem  to  belong  properly  to 
the  engineer. 

That  is,  there  must  be  a  Traffic  Engineer,  with 
practical  operating  experience  and  a  general  knowl- 
edge of  traffic  matters  acting  with  the  traffic  official 
and  the  lawyer  in  order  that  the  interest  of  the  rail- 
road be  properly  safeguarded. 

The  necessity  for  more  accurate  data  as  to  abso- 
lute or  relative  cost  of  transportation  is  very  ap- 
parent at  hearings  before  the  State  and  Interstate 


RATES  259 

Commerce  Commissions  when  the  fairness  of  a  rate 
is  being  investigated. 

The  writer  believes  that  while  many  of  the  Com- 
missions exaggerate  the  importance  of  cost  of  ser- 
vice as  compared  with  the  value  of  service,  the  fact 
remains  that  under  present  conditions,  the  railroads' 
position  at  such  hearings  could  in  many  cases  be 
materially  strengthened  by  cost  data  more  reliable 
than  has  yet  been  developed. 

Cost  Data  More  Important  in  Near  Future 

The  least  consideration  of  existing  conditions  will 
show  the  necessity  for  the  study  and  analysis  of  the 
relation  of  expense  to  traffic  here  suggested.  The 
importance  of  the  subject  is  likely  to  be  increased, 
rather  than  diminished,  by  events  which  may  be  rea- 
sonably anticipated. 

The  whole  industrial  and  commercial  interest  of 
the  country  is  preparing  for  a  largely  increased  ex- 
port of  manufactured  and  other  products.  It  is  in- 
evitable that  industries  located  at  interior  points  and 
those  located  nearer  the  sea  ports  will  soon  be  in 
keen  competition  with  each  other  for  a  portion  of 
this  export  trade. 

.  The  transportation  charges  on  the  raw  material 
from  the  interior  to  industries  near  the  coast,  and 
on  manufactured  products  from  the  interior  to  it, 
will  often  be  a  very  large  factor  in  this  industrial 
competition.  In  consequence,  much  pressure  will 
be  brought  to  bear  upon  the  carriers  for  reductions 
in  rates  on  the  export  traffic  and  the  margin  of  profit 
in  transporting  it  will  necessarily  be  narrow. 

Without  information,  within  reasonably  definite 
limits,  as  to  the  actual  or  relative  cost  of  transport- 
ing various  classes  of  traffic,  the  carriers  are  in  dan- 
ger of  either  reducing  their  rates  too  much,  in  com- 
petition with  each  other  for  the  traffic,  or  on  the 


260  VALUATION  AND  RATES 

other  hand,  not  making  concessions  to  some  indus- 
tries sufficient  in  amount  to  allow  them  to  market 
their  products  at  a  profit  and  still  leave  a  profit  for 
the  carrier. 

That  is  to  say,  with  the  margin  of  profit  very  nar- 
row, definite  information  as  to  actual  or  relative  cost 
is  absolutely  essential  in  conducting  the  business  eco- 
nomically, with  profit  and  justice  to  the  carrier  and 
the  shipper. 

Nothing  said  in  this  discussion  of  the  necessity  for 
more  accurate  data  as  to  cost  of  service,  detracts 
from  the  force  of  the  statement  heretofore  made, 
that  rates  cannot  be  based  strictly  on  cost  of  service. 

Cost  of  service  is  only  one  of  many  elements  to  be 
considered  in  making  rates.  It  is  however  a  limiting 
factor  in  all  rates,  from  the  fact  that  no  rate  can  be 
justly  made  which  does  not  cover  the  actual  out-of- 
pocket  expense  incurred  in  performing  the  service 
for  which  the  rate  is  charged. 

Any  rate  which  does  not  cover  such  expense  is 
fundamentally  wrong  and  unjust,  in  that  the  other 
items  of  traffic  transported  must  bear  a  burden  of 
cost  not  justly  attaching  to  them  if  any  portion  of 
the  traffic  is  carried  at  a  loss. 

Value    of    Service    Basis** 

This  euphonious  title  is  a  substitute  for  the  much 
abused  "What  the  traffic  will  bear."  To  the  general 
public  it  has  heretofore  meant  a  method  of  extortion, 
while  it  is  in  fact  a  principle  of  moderation.  It  is 
based  on  equality  of  sacrifice  by  those  who  pay  the 
rates ;  on  equitable  concessions  by  the  stronger  to  the 
weaker  members  of  a  community.  Freight  of  high 
value  and  traffic  near  its  market  is  made  to  average 


**This  article  is  suggested  in  large  part  by  the  discussion  of 
the  same  subject  in  "Elements  of  Railway  Economics,"  by  W.  M. 
Acworth. 


RATES  261 

up  rates  with  bulky  freight  of  low  value  and  traffic 
distant  from  its  market.  Under  this  system  there  are 
three  general  classes  of  rates: 

(1)  Those  which  apply  to  traffic,  which  either 
through  being  bulky  and  of  low  value  or  which 
requires  long  hauls  to  bring  it  to  market,  is  unable 
to  bear  high  rates.     The  rates  are  just  far  enough 
above   the    actual    additional    expense    incident   to 
handling  the  traffic  to  furnish  a  small  profit,  no  part 
of  the  interest  and  other  fixed  charges  or  fixed  op- 
erating expense  being  included  in  the  rate. 

(2)  Those  applying  to  medium  class  traffic,  the 
rates  including  actual  expense  and  a  proportionate 
part  of  fixed  charges  and  fixed  operating  expense. 

(3)  Those  applying  to  high  class  traffic — goods 
of  large  value — and  to  traffic  near  its  market,  the 
rates  including  actual  expense  and  a  larger  part  of 
fixed  charges  and  fixed  operating  expense. 

Justification   of   Value   of   Service    Basis 

What  effect  do  such  rates  have  on  the  interests  of 
those  most  concerned — the  railroad,  the  public  and 
the  shipper  of  high  class  traffic? 

It  will  be  noted  that  even  on  the  lowest  class  of 
traffic  there  is  still  a  profit  to  the  railroad,  however 
small  it  may  be,  and  that  all  business  contributes 
something  toward  the  expenses  of  the  railroad. 

It  is  beneficial  to  the  public,  because  traffic  in 
many  commodities  that  it  needs  is  made  possible 
which  could  not  move  if  it  were  compelled  to  pay  the 
actual  expense  and  its  full  share  of  fixed  charges  and 
fixed  expenses. 

It  is  in  the  interest  of  the  high  class  traffic,  be- 
cause any  amount  paid  by  the  lowest  class  of  traffic, 
in  addition  to  the  actual  additional  cost  its  movement 
involves,  helps  pay  the  general  expenses  of  the  rail- 


262  VALUATION  AND  RATES 

road,  which  the  high  class  traffic  would  otherwise 
have  to  pay  unaided. 

Argument  of  the  First  Interstate  Commerce 
Commission 

In  the  beginning  of  their  investigation  in  1887  the 
Interstate  Commerce  Commission  was  compelled  to 
consider  the  question  of  whether  rates  based  on  what 
the  traffic  would  bear — value  of  service — rather  than 
on  cost,  were  fair  and  equitable.  The  Chairman  of 
the  Commission  at  that  time  was  the  great  constitu- 
tional lawyer,  Judge  Cooley.  The  conclusion  of  the 
Commission,  as  published  in  the  first  annual  report, 
is  expressed  in  the  following: 

"It  was  very  early  in  the  history  of  railroads  per- 
ceived that,  if  these  agencies  of  commerce  (rail- 
roads) were  to  accomplish  the  greatest  practicable 
good,  the  charges  for  the  transportation  of  different 
articles  of  freight  could  not  be  apportioned  among 
such  articles  by  reference  to  the  cost  of  transporting 
them  severally ;  for  this,  if  the  apportionment  of  cost 
were  possible,  would  restrict  within  very  narrow 
limits  the  commerce  in  articles  whose  bulk  or  weight 
was  large  as  compared  with  their  value. 

"On  the  system  of  apportioning  the  charges  strictly 
to  the  cost,  some  kinds  of  commerce,  which  have 
been  very  useful  to  the  country,  and  have  tended 
greatly  to  bring  its  different  sections  into  more  inti- 
mate business  and  social  relations,  could  never  have 
grown  to  any  considerable  magnitude,  and  in  some 
cases  could  not  have  existed  at  all,  for  the  simple 
reason  that  the  value  at  the  place  of  delivery  would 
not  equal  the  purchase  price  with  the  transportation 
(cost)  added. 

"The  traffic  would  thus  be  precluded,  because  the 
charge  for  carriage  would  be  greater  than  it  could 
bear.  On  the  other  hand,  the  rates  for  the  carriage 


RATES  263 

of  articles  which  within  small  bulk  or  weight  con- 
centrate great  value  would,  on  that  system  of  rate- 
making  be  absurdly  low  when  compared  to  the  value 
of  the  articles,  and  perhaps  not  less  so  when  the  com- 
parison was  with  the  value  of  the  service  in  trans- 
porting them. 

"It  was,  therefore,  seen  not  to  be  unjust  to  appor- 
tion the  whole  cost  of  service  among  all  the  articles 
transported  upon  a  basis  that  should  consider  the 
relative  value  of  the  service  more  than  the  relative 
cost  of  carriage. 

"Such  method  of  apportionment  would  be  best  for 
the  country,  because  it  would  enlarge  commerce  and 
extend  communication ;  it  would  be  best  for  the  rail- 
road, because  it  would  build  up  a  large  business ;  and 
it  would  not  be  unjust  to  property  owners,  who 
would  thus  be  made  to  pay  in  some  proportion  to 
benefit  received. 

"Such  a  system  of  rate-making  would  in  principle 
approximate  taxation;  the  value  of  the  article 
carried  being  the  most  important  element  in  deter- 
mining what  shall  be  paid  upon  it. 

"To  take  each  class  of  freight  by  itself,  and  meas- 
ure the  reasonableness  of  charges  by  reference  to  the 
cost  of  transporting  that  particular  class,  though  it 
might  seem  abstractedly  just,  would  neither  be  prac- 
ticable for  the  carriers  nor  consistent  with  the  public 
interest. 

"The  public  interest  is  best  served  when  the  rates 
are  so  apportioned  as  to  encourage  the  largest  prac- 
ticable exchange  of  products  between  different  sec- 
tions of  our  country  and  with  foreign  countries ;  and 
this  can  only  be  done  by  making  value  an  important 
consideration,  and  by  placing  upon  the  higher  classes 
of  freight  some  share  of  the  burden  that  on  a  rela- 
tively equal  apportionment,  if  service  alone  were 
considered,  would  fall  upon  those  of  less  value. 


264  VALUATION  AND  RATES 

"With  this  method  of  arranging  tariffs  little  fault 
is  found,  and  perhaps  none  at  all  by  persons  who 
consider  the  subject  from  the  standpoint  of  public 
interest." 

Analogies  in  Commercial  and  Other  Pursuits 

As  heretofore  shown  in  the  article  on  Importance 
of  Cost  Data,  it  is  not  always  possible  to  say  which 
part  of  the  selling  price  of  any  commodity  is  cost 
and  which  part  is  profit.  As  it  reaches  the  retail 
merchant  however,  it  has  for  him  a  definite  cost. 

Merchants'  Rates 

Suppose  a  suit  of  clothes  costs  the  retail  merchant 
$15.  If  he  offered  this  at  $20  he  would  receive  his 
cost  and  what  would  be  considered  a  fair  profit.  But 
if  he  can  sell  for  $25  he  will  not  sell  for  $20,  simply 
because  the  latter  represents  cost  plus  a  profit  at  a 
certain  per  cent. 

He  will  base  his  price  on  the  value  of  the  clothes 
to  the  purchaser,  not  on  the  cost  to  himself.  If  near 
the  end  of  the  season  he  finds  himself  over-stocked, 
he  will  reduce  his  price  to  say  $18  and  while  the 
profit  is  less,  still  it  is  a  profit;  if  he  can  only  sell 
at  $12,  he  will  do  so,  on  the  principle  that  a  small 
loss  is  better  than  a  total  one. 

The  groceryman  sells  common  sugar,  in  a  paper 
bag,  at  the  narrowest  margin  of  profit,  and  loaf 
sugar,  in  a  box,  at  a  much  greater  profit,  although 
the  latter  sale  costs  him  less  to  make  than  the  former. 
He  sells  tomatoes,  packed  in  cans,  at  a  smaller  profit 
than  he  does  asparagus  tips  or  imported  French  peas, 
packed  in  cans,  but  his  cost  of  selling  is  the  same  in 
either  case. 

The  tobacconist  sells  a  five  cent  package  of  smok- 
ing tobacco  at  an  infinitessimal  profit,  and  an  im- 


RATES  265 

ported  cigar  at  a  good  round  one,  although  his  cost 
of  service  is  the  same. 

The  business  of  the  clothier,  groceryman  and  to- 
bacconist is  on  a  value  of  service  basis,  in  the  main 
— not  on  cost  of  service,  except  that  the  profits  from 
all  of  their  customers  together,  must  furnish  enough 
money  to  pay  all  of  their  business  expenses  and 
charges  and  a  fair  profit  for  their  services.  The  ap- 
portionment of  the  expenses,  charges  and  profits 
among  their  customers  is  made  on  the  basis  of  their 
respective  abilities  to  pay. 

The  clothier  does  no  injustice  to  the  man  who  pays 
$25  for  his  suit,  when  he  sells  the  same  kind  of  suits 
later  at  $18  or  $12  to  other  customers.  If  he  were 
unable  to  reduce  his  loss  by  selling  for  $12,  or  to 
make  his  smaller  profit  on  the  $18  sale,  evidently  all 
other  customers  must  pay  more  for  what  they  buy, 
because  the  business,  as  a  whole,  must  pay  all  ex- 
penses, charges  and  profits  and  these  latter  sales  at 
lower  prices  reduce  the  losses  or  increase  the  profit 
to  some  extent. 

Professional    Rates 

A  broker  in  selling  securities,  charges  a  percentage 
of  the  value  of  securities,  not  for  the  labor  involved, 
for  it  is  much  the  same  whether  one  or  a  hundred 
shares  are  sold.  If  his  customers  all  bought  one 
share  only  he  could  not  live. 

A  doctor  charges  on  the  basis  of  the  ability  of  his 
patient  to  pay — one  price  to  the  poor  man  and  a 
higher  one  to  the  wealthy,  although  the  work  and 
the  skill  are  the  same  in  both  instances.  The  law- 
yer's fees  are  based  largely  on  the  values  and  the 
importance  of  the  issue  involved  when  he  writes  his 
opinion  or  defends  his  client. 

All  of  these  brokers  and  professional  men  base 
their  charges  on  value,  not  on  cost  of  service,  and 
they  seek  to  average  their  charges  so  that  the  return 


266  VALUATION  AND  RATES 

from  all  of  them  will  give  an  adequate  remuneration 
to  themselves  and  not  bear  heavily  on  any  one  class 
of  their  clients. 

It  is  not  unfair  to  the  wealthy  man  that  the  doctor 
charges  the  poor  man  less,  for  if  the  doctor  did  not 
receive  some  part  of  his  income  from  the  poor  man 
he  must  evidently  collect  more  from  the  wealthy 

one  to  obtain  an  adequate  income. 

i 
.1 
Rates   Charged    for   Electric   Current 

The  supplying  of  electric  current  is  practically 
a  monopoly  under  public  control.  The  charges  per 
unit  for  its  use  vary  more  widely  than  railroad  rates. 

In  the  earlier  history  of  the  business,  lighting  rates 
were  fixed  with  reference  to  the  rates  charged  for 
illuminating  gas,  so  that  the  new  industry  might 
compete  for  the  business  of  supplying  light,  which 
had  been  monopolized  by  the  gas  companies  for  a 
long  period  of  time. 

The  rates  for  supplying  electric  current  for  power 
purposes  were,  and  still  are,  made  on  such  a  basis 
as  to  induce  the  users  of  steam  and  gasoline  power 
plants  to  substitute  electrical  current  and  appliances 
for  them. 

At  the  present  time — 1916 — the  lighting  rates  in 
Chicago  are: 

First  30  hours  of  maximum  demand  per  month  10  cents  per 
Kilo-watt-hour. 

Next  30  hours  of  maximum  demand  per  month,  5  cents  per 
Kilo  -watt-hour. 

All  in  excess  of  above,  3  cents  per  Kilo -watt- hour. 

The  Commonwealth-Edison  Company  state,  that 
the  general  average  paid  for  lighting,  in  the  city  as  a 
whole,  is  approximately  6  cents  per  kilo-watt-hour. 

The  rates  for  power  current  vary  from  0.8  cents 
to  6  cents  per  kilo-watt-hour,  depending  on  the 
amount  of  current  used  and  the  condition  attending 


RATES  267 

its  use.  The  current  for  the  motor  used  for  cleaning 
hats  at  the  shoe-shining  stand  will  usually  cost  about 
6  cents  per  k-w-h;  the  current  for  the  immense  ce- 
ment plant,  which  uses  maximum  power  24  hours 
per  day,  costs  about  0.8  cents  per  k-w-h. 

It  will  be  noted  that  these  rates  are  based  on  both 
the  cost  and  the  value  of  the  service,  the  latter  being 
the  controlling  factor,  and  that  they  are  lower  for 
wholesale  than  for  retail  use,  although  the  cost  of 
current  production  is  the  same. 

Production  of  electric  current  involves  large  cap- 
ital cost  for  machinery  and  transmission  systems. 
The  plant  and  force  must  be  able  to  supply  the  maxi- 
mum demand  for  current.  This  maximum  demand 
for  lighting  lasts  only  for  about  three  hours  of  the 
day;  for  the  balance  of  the  time  the  larger  part  of 
the  plant  is  idle,  with  large  fixed  charges,  operating 
expense  and  depreciation  going  on  constantly. 

If  power  consumers  can  be  induced  to  use  current 
by  the  lower  price,  the  additional  cost  per  unit  to  the 
company  of  producing  the  additional  current  is 
small,  compared  with  the  cost  of  producing  a  unit 
for  lighting  only,  particularly  as  the  use  of  current 
for  power  does  not  occur  at  the  same  time  as  the 
maximum  load  required  for  lighting.  Even  if  the 
profit  per  unit  on  the  power  current  is  small,  it  helps 
pay  the  general  expenses  of  the  company. 

This  lower  rate  is  not  made  possible  at  the  ex- 
pense of  the  user  of  light  current  at  a  higher  rate, 
but  in  fact  reduces  his  rate.  The  constant  and  sub- 
stantial reductions  in  all  rates  which  have  actually 
been  put  in  eifect  and  which  are  next  shown,  prove 
the  soundness  of  the  reasoning. 

The  following  statement  shows  the  average 
prices  paid  for  electric  current  for  lighting  purpose 
for  various  periods: 


268  VALUATION  AND  KATES 

1896—1897  Per  Kilo-Watt-Hour  19.5  cents 

1898—1904  "  13.33  cents 

1905  "  12.00  cents 

1914  "  6.00  cents 

This  data  shows  that  the  cost  of  lighting  to  con- 
sumers has  been  reduced  69%  in  about  20  years, 
largely  through  the  application  of  this  principle  of 
rate-making.  In  the  last  six  years,  it  has  also  served 
to  reduce  the  average  cost  to  the  users  of  power 
current  by  percentages  varying  from  36%  to 
43.7%.** 

These  reductions  approximate  those  which  have 
been  made  in  railroad  rates,  between  the  inception  of 
the  railroad  enterprises  and  the  present,  through  the 
application  of  the  same  principle. 

As  in  the  other  cases  cited,  the  total  receipts  from 
all  sources  must  pay  all  charges  and  expenses  plus  a 
profit,  but  the  rates  are  based  mainly  on  value  of 
service  and  not  on  cost,  for  the  cost  of  producing 
the  current  used  for  various  purposes  is  the  same 
and  the  rates  vary  with  class  of  service. 

Canal  and  Turnpike  Rates 

The  canal  and  turnpike  tolls  have  always  been 
based  on  ability  to  pay.  Tolls  are  charges  for  the 
use  of  the  canal  or  road  and  do  not  include  the  serv- 
ice of  transportation  over  them. 

It  costs  such  companies  no  more  to  allow  a  ton  of 
apples  to  be  hauled  than  a  ton  of  stone  or  any  other 
commodity  passing  over  or  through  their  facilities, 
and  yet  they  have  always  differentiated  between 
commodities. 

An  old  tariff  of  the  Sheffield  Canal  in  England 
provided  for  a  rate  of  4  cents  per  ton  on  turnips  and 
potatoes  and  8  cents  on  onions,  apples,  peas  and 

**Data  in  regard  to  rates  furnished  by  the  Commonwealth- 
Edison  Co.  of  Chicago. 


RATES  269 

beans;  for  pig  iron  6  cents  per  ton  and  for  bar,  rod 
or  rolled  iron  8  cents;  for  "green  groceries"  8  cents 
per  ton  and  for  "dry  groceries  and  all  kinds  of  manu- 
factured goods"  10  cents. 

Rates    of    Taxation 

The  foregoing  are  analogies  with  methods  used  in 
commercial  lines  of  business.  The  community  as  a 
whole,  acting  in  its  corporate  capacity,  follows  the 
same  method  in  taxation.  All  taxation  of  real  estate 
and  improvements  is  based  on  the  value  of  the  prop- 
erty. 

The  owner  of  a  building  costing  $20,000,  built  on 
a  lot  with  a  50  foot  frontage,  gets  no  more  service 
for  his  taxes  than  an  owner  of  a  building  costing 
$3,000  built  on  a  lot  with  the  same  street  frontage. 

The  cost  of  policing,  fire  protection,  street  mainte- 
nance and  all  other  work  and  things  required,  for 
which  taxation  is  laid  on  the  property,  is  the  same 
in  one  case  as  in  the  other. 

So  too  with  the  income  tax  of  the  Government 
and  the  inheritance  tax  of  the  State.  The  large  in- 
come and  the  large  inheritance  are  taxed  at  a  higher 
rate  than  the  moderate  ones  and  the  small  ones  are 
not  taxed  at  all. 

That  is,  taxes  are  based  on  equality  of  burden  or 
sacrifice  of  the  citizens.  The  laborer,  clerk  or  me- 
chanic, who  has  only  a  narrow  margin  between  in- 
come and  living  expense  is  not  asked  to  pay  even  a 
small  portion  of  his  small  margin;  the  large  income 
and  the  estate  of  the  capitalist  are  well  able  to  pay 
a  differential  rate  over  that  of  the  moderately  well- 
to-do  merchant. 

In  all  taxes  laid  on  real  estate,  improvements,  in- 
comes, or  inheritance,  this  principle  of  equality  of 
burden  or  sacrifice  is  applied  in  fixing  the  rate. 


270  VALUATION  AND  BATES 

Charging  what  the  traffic  will  bear,  or  basing  the 
rate  on  the  value  of  the  service  to  the  user  or  on  his 
ability  to  pay,  is  not  peculiar,  then,  to  railroads.  It 
applies  in  all  commercial  lines,  professional  fees,  the 
charges  of  other  public  service  corporations  and  to 
rates  of  taxation — that  is  it  prevails  in  all  business 
life  and  public  service. 

Classification 

The  foregoing  discussion  shows  that  the  traffic  as 
a  whole  pays  the  expenses,  fixed  charges  and  profits 
as  a  whole;  that  each  separate  item  of  traffic  pays 
such  portion  of  that  whole  as  it  is  able  to  pay.* 

The  apportionment  between  the  different  items 
can  only  be  an  approximate  one  at  the  best,  but  it 
seeks  to  distribute  the  burden  equitably. 

Boots  and  shoes,  new,  are  first  class ;  old  worn-out 
shoes,  third  class  in  less  than  carload  lots,  and  fifth 
class  in  carload  lots.  It  evidently  costs  the  railroad 
company  as  much  to  haul  the  same  weight  of  old 
shoes  packed  in  boxes  as  it  does  new  shoes  packed 
in  boxes,  but  if  it  charged  as  much  for  the  service 
little  traffic  would  move. 

It  is  also  evident  that  old  shoes  shipped  in  cars, 
loaded  by  consignor  and  unloaded  by  consignee  and 
forwarded  under  one  bill  of  lading,  will  cost  the  rail- 
road company  less  per  100  Ibs.  than  a  few  boxes  of 
old  shoes  weighing  several  hundred  pounds,  for- 
warded by  various  consignors  and  hence  billed  sepa- 
rately and  loaded  and  unloaded  at  the  cost  of  the 
railroad. 

The  third  class  rate  on  old  shoes  as  referred  to  the 
first  class  rate  on  new  shoes  is  based  on  value  of  serv- 
ice; the  fifth  class  rate  on  carload  lots  of  old  shoes 

*In  this  connection,  it  must  be  remembered  that  the  phrase 
"Can  pay"  or  "ability"  to  pay  is  modified  by  "what  the  traffic  will 
consent  to  pay"  as  illustrated  in  following  pages. 


RATES  271 

as  referred  to  the  first  class  rate  on  less  than  carload 
lots  of  new  shoes,  is  based  on  a  combination  of  value 
of  service  and  cost  of  service. 

The  ores  of  Gold,  Silver,  Copper  and  Lead,  in 
sacks,  boxes  or  barrels,  when  the  value  exceeds  one 
dollar  per  pound  are  classified  at  double  first  class; 
when  value  does  not  exceed  40  cents  per  pound,  first 
class;  when  value  is  between  5  and  40  cents  per 
pound,  second  class ;  when  5  cents  or  less,  third  class. 
Iron  ore,  similarly  packed  is  classified  fourth  class. 

These  classifications  are  based  on  the  value  of  the 
commodity  and  the  increased  liability  of  the  railroad 
in  case  of  loss  in  transportation  or  by  theft. 

Paint,  in  glass  or  earthenware,  packed  in  barrels, 
is  classified  first  class ;  in  pails  or  metal  cans  packed 
in  barrels,  third  class;  in  bulk,  in  barrels,  fourth 
class.  These  classifications  are  based  on  value  of 
commodity  and  the  liability  of  the  railroad  to  loss  on 
account  of  breakage  in  transportation. 

Stove  Ovens,  knocked  down,  flat  and  crated,  are 
classified  third  class;  when  not  knocked  down,  but 
crated,  first  class.  These  classifications  are  based 
on  the  difference  of  space  required  in  the  car  per 
unit  of  weight,  on  account  of  the  manner  of  packing, 
which  affects  the  cost  of  service  of  the  railroad. 

To  summarize  this,  Classification,  is  based  in  some 
cases  on  value  of  service,  in  others  on  cost  of  service, 
in  still  others  by  a  combination  of  the  two.  The  value 
of  the  commodity,  the  liability  to  loss  through  theft 
or  breakage  in  transportation  or  handling,  and  the 
ratio  between  space  occupied  and  weight,  are  all 
factors  entering  into  classification  and  hence  in  the 
charge  made  for  performing  the  transportation 
service. 

Methods  of  Rate-Making 

Many  of  the  states  have  established  through  their 
commissions  what  are  known  as  a  mileage  scale  of 


272  VALUATION  AND  RATES 

railroad  rates  and  in  some  cases  independent  classi- 
fications as  well.  As  different  classifications  are  ap- 
plicable in  different  states,  comparisons  between  the 
rate  schedules  as  a  whole  can  not  be  made  usually, 
but  must  be  confined  to  individual  commodities. 
There  are  certain  general  principles  however  under- 
lying the  construction  of  all  of  these  scales. 

The  following  table  shows  the  rates  for  distances, 
10  to  500  miles,  and  the  rate  per  ton-mile  as  well, 
on  first  class  merchandise  and  on  carload  shipments, 
as  provided  in  the  mileage  distance  scale  established 
by  the  Illinois  Commission. 

Illinois  Mileage  Distance  Scale  ** 

Merchandise,  Merchandise,  Carloads,  Carloads, 

1st  Class,           1st  Class,  6th  Class,  6th  Class, 

Rates  per  Rates  Rates  per 

ton-mile.  per  ton.             ton-mile. 

24     cents  $1.02  10.2  cents 

6          "  2.34                   2.3      " 

3.9       "  3.04                   1.5      " 

3.0       "  3.40                   1.13    " 

2.4       "  3.82                   0.95    " 

2.0       "  4.10                   0.82    " 

**The  entire  scale  is  not  shown;  only  enough,  and  in  such  form 
as  will  illustrate  the  principles  of  rate-making  involved  in  its 
construction. 

The  rates  per  ton  increase  with  the  distance,  but 
not  nearly  as  fast.  Comparing  the  rates  in  the  sec- 
ond column  (Merchandise,  1st  class)  for  10  and  400 
miles,  it  will  be  seen  that  while  the  distance  is  40 
times  as  great,  the  rate  is  just  4  times — that  is  the 
rate  has  increased  only  one-tenth  as  fast  as  the  dis- 
tance, so  that  the  rate  per  ton-mile  is  only  one-tenth 
as  much  at  the  greater  as  at  the  smaller  distance. 

Comparing  the  rates  for  10  and  500  miles  in  the 
fourth  column  (6th  class,  carload  shipments),  it  will 
be  seen  that  while  the  distance  is  50  times  as  great, 
the  rate  is  just  4  times — the  rate  has  increased 
only  one-twelfth  as  fast  as  the  distance,  so  that  the 


RATES  273 

:ate  per  ton-mile  is  only  one-twelfth  as  much  at  the 
greater  as  at  the  smaller  distance. 

While  these  exact  ratios  of  distance  to  rate  do  not 
exist  as  to  all  Mileage  Scales,  the  same  principle  is 
used  in  constructing  all  State  and  Railroad  Associa- 
tion scales. 

The  explanation  for  the  decrease  in  the  rate  per 
ton  mile  as  distance  increases  is  found  in  the  follow- 
ing facts: 

(1)  The  terminal   charges   are  included  in  the 
rate,  and  are  the  same  regardless  of  the  distance. 
This  explains  the  large  decrease  in  cost  per  ton- 
mile  between  10  and  100  miles.    On  short  hauls  the 
terminal  charge  is  a  large  proportion  of  the  whole 
rate;  in  the  case  of  a  10  mile  haul  perhaps  50%  of 
it*,  on  a  100  mile  haul  20%,  on  500  mile  haul,  12%. 

(2)  The  greater  the  distance  hauled,  the  less  per 
ton-mile  cost  to  haul  it.    That  is  10  tons  hauled  20 
miles,  making  200  ton  miles,  costs  more  than  1  ton 
hauled  200  miles,  although  the  total  ton-miles  are 
the  same  in  each  case. 

The  reasons,  broadly,  are  that  long  hauls  get  more 
mileage  out  of  engines,  cars  and  train  crews;  the 
engines  and  cars  are  more  nearly  loaded  to  capacity ; 
the  line  more  continuously  utilized  and  the  delays 
occasioned  by  loading  and  unloading  at  short  inter- 
vals are  avoided.** 

(3)  Traffic  becomes  less  able  to  bear  the  rate  as 
distance  increases,  as  it  (the  rate)  becomes  a  larger 
proportion  of  the  value  of  the  commodity  trans- 
ported.    In  the  case  of  coal,  limestone,  sand  and 
such  commodities,  this  factor  applies  at  compara- 
tively short  distances  as  the  rate  is  a  large  portion 
of  the  selling  price ;  in  the  case  of  Boots  and  Shoes 

*On  basis  of  3  cents  per  hundred,  or  60  cents  per  ton,  at  each 
terminal. 

**This  is  another  way  of  saying  that  "through"  freight  costs 
less  to  transport  than  "local"  freight. 


274 


VALUATION  AND  RATES 


or  Millinery,  it  scarcely  limits  the  distance  of 
shipment  at  all,  the  percentage  that  the  rate  charged 
per  ton  bears  to  the  value  per  ton  of  Shoes  or  Mil- 
linery being  small  even  for  the  longest  distances. 

Percentage  and  Differential  Method  of  Rate 
Construction 

More  than  50%  of  the  total  railroad  traffic  of  the 
United  States  is  moved  within  an  area  known  as  Cen- 
tral Freight  Association,  Trunk  Line  and  New  Eng- 


** 


land  territories.     The  small  accompanying  map 
indicates  in  a  general  way,  the  boundaries  of  these 
traffic  territories. 


**The  map  shows  the  territories  between  which  the  rates 
apply.  The  boundary  of  Central  Freight  Association  territory  in 
north-western  Illinois,  is  not  exactly  as  shown  on  the  map,  the 
rates  applying  to  points  west  of  the  western  boundary  of  this 
Association's  territory.  This  has  no  significance  so  far  as  this 
discussion  is  concerned,  the  term  Central  Freight  Association  as 
used  herein  being  intended  to  cover  the  territory  as  indicated  on 
the  map. 


RATES  275 

The  rates  applying  between  Central  Freight  As- 
sociation territory,  on  the  one  hand,  and  Trunk  Line 
— New  England  territories,  on  the  other,  are  made 
by  what  may  be  termed  the  Percentage  and  Differ- 
ential Method  of  rate-making,  which  is  next  de- 
scribed. (This  discussion  does  not  refer  to  rates  be- 
tween two  points,  both  of  which  are  in  Central 
Freight  or  both  of  which  are  in  the  Eastern  terri- 
tories, but  to  rates  between  two  points,  one  of  which 
is  in  Central  Freight  and  the  other  in  the  Eastern 
territories.) 

Base  Rate 

The  rates  from  Chicago  to  New  York  are  the  base 
or  unit  rates  and  are  termed  100  per  cent  rates. 
The  rates  between  all  points  in  the  Central  States 
and  the  City  of  New  York  are  some  percentage  of 
this  rate,  varying  from  60%  to  120%. 

At  the  time  the  method  was  adopted,  the  Chicago- 
New  York  rates  were : 

100  PER  CENT  RATES 

Classes        123456 
Rates  in  Cents  per  100  Ibs  75       65       50       35       30       25 

Percentage  Groups 

The  distance  from  Chicago  to  New  York  was  taken 
at  920  miles  and  the  terminal  charges  as  3  cents 
at  each  of  the  termini  or  a  total  of  6  cents.  A  de- 
duction of  6  cents  for  terminal  charges  was  first 
made  from  the  6th  class  rate  of  25  cents,  leaving 
19  cents  as  the  amount  allowed  for  hauling  a  dis- 
ance  of  920  miles  or  at  the  rate  of  0.0206  cents  per 
mile  per  100  Ibs.** 

For  other  points  in  the  territory,  the  rates  were 
fixed  at  a  percentage  of  the  rate  from  Chicago  to 

**Rate  per  ton -mile  4.12  mills. 


276  VALUATION  AND    RATES 

New  York,  the  points  taking  rates  higher  or  lower 
as  they  were  more  or  less  distant*  from  New  York, 
than  was  Chicago.  The  factor  of  0.0206  cents  mul- 
tiplied by  its  distance  from  New  York,  plus  6 
cents  for  terminal  charges,  established  the  rate  for 
any  point.  The  percentage  which  the  rate  so  estab- 
lished bore  to  the  base  rate  of  25  cents,  determined 
the  percentage  of  the  Chicago-New  York  rates 
which  the  particular  point  would  take. 

When  first  put  into  effect,  these  rates  applied  only 
to  competitive  and  junction  points,  the  rates  to 
points  intermediate  being  made  by  adding  the  rate 
from  the  nearest  junction  to  the  through  rate  of  the 
junction  point.  Finally  these  intermediate  points 
were  grouped,  with  the  junctions  taking  the  same 
rates,  and  these  have  been  termed  Percentage 
Groups. 

The  following  will  serve  to  illustrate  the  manner 
of  arriving  at  the  rates  to  these  various  percentage 
groups. 

Fort  Wayne,  Ind.,  is  in  the  90%  Group.  Muncie 
is  the  basing  point  for  that  group  and  is  798  miles 
from  New  York.  Its  rate  then  is  : 

798  miles  x  0.0206  cents  per  mile  =  16.44  cents 
Add  terminal  charges..   6.00  cents 

Rate  from  Muncie  to  New  York. ,:  22.44  cents 

22.44  cents-^-25  cents,  base  rate,=89.76  per  cent, 
or  using  the  rule  for  disposing  of  fractions,  in  which 
a  fraction  exceeding  one-half  is  considered  a  full 
per  cent,  we  have  90%,  and  all  points  in  that  group 
take  a  rate  to  New  York  of  90%  of  the  Chicago-New 
York  rate. 

This  placed  the  rates  between  all  groups  in  the 
Central  states  and  New  York  City  on  a  strict  mileage 

*Measured  by  the  shortest  route  "worked  or  workable." 


RATES  277 

basis  in  the  beginning,  but  certain  conditions  have 
caused  these  to  be  altered  in  a  few  situations,  as 
will  be  shown  later. 

Differentials 

The  rates  between  Central  States  points  and  other 
Atlantic  sea  ports  than  New  York,  were  made  cer- 
tain differentials  over  or  under  the  rate  from  the 
same  points  to  New  York. 

These  differentials  are: 

FROM  Central   States— EASTBOUND 

TO  Deduct  from  Chicago-New  York  rate 

Classes  123456 

Baltimore,  Md.  Cents  per  100  Ibs.  333333 
Philadelphia,  Pa.  Cents  per  100  Ibs.  222222 

Add  to  Chicago-New  York  rate 
Boston,  Mass.         Cents  per  100  Ibs.         765432 

TO   Central    States— WESTBOUND 

FROM  Deduct  from  Chicago -New  York  rate 

Classes  123456 

Baltimore,  Md.  Cents  per  100  Ibs.  8  83  3  3  3 
Philadelphia,  Pa.  Cents  per  100  Ibs.  6  6  2,2  2  2 
Boston,  Mass.  Same  as  New  York-Chicago  rate- 

The  following  table  shows  the  mileage  from  Chi- 
cago to  these  various  Atlantic  sea-ports : 

Miles 

Chicago  to  Boston , 1006 

"    New  York** — Basing  distance ...      920 

"    Philadelphia 823 

"    Baltimore 782 

Note  the  differences  between  the  basing  distance 
Chicago  to  New  York  of  920  miles  and  the  three 
other  points: 

Miles 

Chicago  to  Boston  exceeds  basing  distance.  . .        86 

Philadelphia  less  than  basing  dist.       97 

"    Baltimore  less  than  basing  dstance     138 

**Actual  short-line  distance  is  now  912  miles. 


278  VALUATION  AND  RATES 

Multiplying  these  differences  by  the  rate  per  100 
Ibs.  charged  for  hauling  between  Chicago  and  New 
York,  which  is  0.0206  cents  per  mile,  we  have- 
Boston  86  miles  x  0.0206  cents  =  1.77*  cents  more 
than  New  York. 

Philadelphia  97  Miles  x  0.0206  cents  =  1.998* 
cents  less  than  New  York. 

Baltimore  138  miles  x  0.0206  cents  =  2.843*  cents 
less  than  New  York. 

It  will  be  seen  that  the  Boston,  Philadelphia  and 
Baltimore  differentials,  6th  class,"  Eastbound,  are 
based  strictly  on  distance. 

The  differentials  from  Philadelphia  and  Baltimore 
to  Chicago,  6th  class,  Westbound,  are  based  on  the 
distances  also.  The  rates  from  Boston  to  Chicago 
Westbound  are  not  based  on  the  distance,  the  rates 
being  the  same  as  from  New  York,  although  the 
distance  is  86  miles  greater. 

The  differentials  on  the  four  lowest  classes  be- 
tween Philadelphia  and  Baltimore  on  the  one  hand, 
and  Chicago  on  the  other,  are  the  same  both  east  and 
west  bound ;  on  the  first  and  second  classes  they  are 
between  Baltimore  and  Chicago  3  cents  east  and  8 
cents  westbound  lower  than  the  Chicago-New  York 
rates;  between  Philadelphia  and  Chicago  2  cents 
east  and  6  cents  westbound  lower  than  Chicago-New 
York  rates. 

To  understand  these  apparently  arbitrary  differ- 
entials, the  difference  in  the  character  of  traffic  east 
and  westbound  and  the  historical  development  of 
the  rates  must  be  taken  into  account.** 


*The  rule  for  disposition  of  fractions  makes  these  2-2  and  3 
cents  respectively. 

**The  rates  covering  the  movement  of  this  traffic  are,  on  the 
whole,  lower  than  any  similar  schedule  of  rates  in  the  country. 
Only  the  large  volume  of  traffic  and  the  relatively  long  average 
haul  make  them  possible. 


KATES  279 

\ 
Competition  Between  Atlantic  Sea  Ports 

Boston,  New  York,  Philadelphia  and  Baltimore, 
all  important  sea  ports,  became  commercial  rivals 
as  transportation  facilities  extended  further  from 
the  Atlantic  Ocean.  The  State  of  New  York  had 
constructed  the  Erie  Canal,  connecting  the  port  of 
New  York  with  the  Great  Lakes.  This  lead  the  State 
of  Pennsylvania  to  project  the  "State  Line  of  Public 
Works"  (a  railroad)  to  connect  Philadelphia  with 
the  territory  west  of  the  Allegheny  Mountains. 
Maryland  interests  constructed  the  Baltimore  and 
Ohio  to  connect  Baltimore  with  the  Ohio  River. 

In  the  earlier  railroad  development  the  main  trunk 
lines  of  railroads  constructed  west  from  the  Atlantic 
ports  were  (1)  What  is  now  the  New  York  Central, 
built  along  the  Hudson  River  and  across  the  central 
part  of  the  state  from  the  port  of  New  York  to  Buf- 
falo; (2)  What  is  now  the  Erie,  constructed  from 
the  port  of  New  York  across  the  extreme  southern 
part  of  the  State  to  the  Lakes;  (3)  The  Pennsylvania 
Railroad,  extending  from  Philadelphia  to  Pitts- 
burgh; (4)  the  Baltimore  and  Ohio  Railroad  ex- 
tending from  Baltimore  to  Parkersburg.  Boston  had 
no  independent  trunk  line  of  its  own  to  the  west, 
but  was  served  by  the  Boston  and  Albany  Railroad, 
which  connected  it  with  the  New  York  Central  at 
Albany. 

Western  Gateways 

Buffalo,  Pittsburgh  and  Parkersburg  were  the 
western  termini  of  these  main  lines  and  from  each 
of  these  points  railroads  radiated  in  all  directions, 
extending  across  Ohio,  Michigan,  Indiana  and  Illi- 
nois. These  in  turn  were  crossed  by  the  north  and 
south  railroads,  constructed  to  connect  the  Great 
Lakes  with  the  Ohio  River. 

Water  transportation  and  favorable  geographical 
position  had,  even  before  the  days  of  the  railroad, 


280  VALUATION  AND  RATES 

made  Chicago  the  gateway  to  the  West  and  North- 
west; St.  Louis  the  gate  to  the  West  and  Southwest 
and  Cincinnati  to  the  South.  These  three  gateways 
were  the  natural  goals  of  the  main  trunk  lines  first 
mentioned.  These  lines  competed  in  carrying  man- 
ufactured products  and  merchandise  west  from  the 
rival  districts  they  served  in  the  east,  and  grain,  and 
packing  house  products  and  raw  materials  from  the 
Central  States  to  the  eastern  districts  and  the  four 
Atlantic  sea-ports. 

Ruinous   Competition 

The  competition  between  these  trunk  lines, 
backed  by  the  business  interests  of  the  communi- 
ties they  served,  was  bitter  and  resulted -in  ruin- 
ously low  rates,  rebating,  and  all  of  the  attendant 
evils.  Rate  schedules  meant  little,  the  actual  rates 
being  chaotic. 

Baltimore  and  Philadelphia  contended  for  lower 
rates  than  New  York  and  Boston  on  the  ground  of 
shorter  distance.  The  necessities  of  commercial 
competition  impelled  the  commercial  interests  of 
these  two  former  ports  to  contest  this  position  to 
the  utmost.  The  conflict  was  carried  on  for  many 
years,  until  in  1877,  the  arrangement  outlined  was 
adopted  as  a  compromise. 

Commercial   Factors  Affecting  Differential  Basis 

The  argument  for  the  arrangement  of  differentials 
adopted  would  be  about  as  follows : 

New  York  was  the  money  center  of  the  country 
and  had  the  best  harbor  on  the  Atlantic  coast, 
which  had  brought  to  it  the  larger  part  of  the  im- 
port and  export  business  of  the  country.  If  Phila- 
delphia and  Baltimore  were  placed  on  the  same  rate 
basis  they  could  not  hope  to  maintain  their  commer- 


RATES  281 

cial  position,  so  that  differential  rates  were  with 
these  two  ports  a  matter  of  business  life  and  death. 

There  was  the  further  consideration  of  abstract 
justice  in  being  entitled  to  a  lower  rate  on  account 
of  shorter  distance.  As  they  had  railroad  systems 
of  their  own,  whose  interests  were  identical  with 
commercial  interests,  they  were  in  position  to  fight 
indefinitely,  even  to  the  extent  of  conducting  the 
transportation  at  a  loss. 

Boston  had  no  independent  through  line  to  the 
west  and  made  the  best  trade  the  circumstances 
would  allow.  The  rates  westbound  were  the  same 
as  New  York  on  all  classes  and  only  2  and  3  cents 
higher  than  her  other  competitors  on  the  four  lowest 
classes.  The  freight  rate  on  Classes  1  and  2  was 
not  a  controlling  factor  in  marketing  such  products 
as  the  rates  were  but  a  small  percentage  of  the  value 
of  the  commodities  embraced  in  those  classes. 

The  eastbound  shipments  were  practically  con- 
fined to  raw  material  or  other  low  class  commodities 
taking  6th  class  or  some  lower  commodity  rate.  It 
was  of  little  practical  consequence  to  Boston  there- 
fore that  its  1st  class  rate  from  Chicago  eastbound 
was  10  cents  higher  than  to  Baltimore  and  9  cents 
higher  than  to  Philadelphia.  On  the  commodities 
which  actually  moved  in  large  volume  eastbound, 
her  rates  were  only  2  cents  per  100  Ibs.  higher  than 
the  New  York  rate  and  5  cents  higher  than  the  low- 
est rate. 

Rates  to  Interior  Eastern  Points 

The  Grand  Trunk  reaches  both  Boston  and  Port- 
land, Maine.  The  distance  from  Chicago  to  the 
latter,  by  this  road,  is  less  than  to  Boston.  Points 
in  Connecticut  are  less  distant  from  Chicago  than 
Boston.  The  distance  from  Chicago  to  all  interior 
points  on  main  lines  in  New  England  is  less  than 
to  the  Atlantic  ports.  On  this  account  all  of  New 


282  VALUATION  AND  RATES 

England  is  on  the  same  rate  basis  that  applies  to 
Boston.* 

The  rates  to  interior  points  in  the  Eastern  territory, 
like  Albany,  Rochester,  Syracuse  and  Utica,  are 
based  on  the  percentage  their  distance  bears  to  the 
Chicago-New  York  basing  distance  of  920  miles.  For 
some  points  located  on  branch  lines  in  eastern  terri- 
tory certain  arbitraries  are  added  to  the  rates  apply- 
ing to  the  points  on  the  main  line  at  which  the 
branch  lines  connect. 

The  rates  applying  to  Baltimore  and  Philadelphia 
are  carried  very  considerable  distances  inland.  For 
instance  Altoona,  Pa.,  takes  Baltimore  rates  and 
Wilkesbarre,  Pa.,  takes  Philadelphia  rates. 

Arbitraries  in  Western  Groups 

In  the  Percentage  Groups  of  the  Central  States, 
there  are  several  instances  where  specific  (instead 
of  percentage)  differences  above  or  below  the  rates 
from  another  basing  point  are  used  in  making  rates. 
Many  years  of  controversy  and  much  expensive  com- 
petition between  the  manufacturers  and  railroads 
interested,  has  resulted  in  making  rates  to  the  east 
from  the  Mahoning  and  Shenango  Valleys  (Youngs- 
town  District)  2  cents  higher,  Cleveland  3  cents 
higher  and  the  Johnstown  District  1V2  cents  lower 
than  the  rates  from  Pittsburgh. 

Adjustment  of  Rates  Maintained 

It  will  be  observed  from  this,  that  the  rates  be- 
tween eastern  and  Central  States  territory  are  auto- 
matically raised  or  lowered  as  the  basic  rate  be- 
tween Chicago  and  New  York  is  raised  or  lowered. 
In  the  recent  advance  of  rates  between  these  terri- 


*On  some  branch  lines,   arbitraries   are  added  for  local  haul 
from  the  junction. 


RATES  283 

tories  the  same  relative  differences  in  rates  from 
different  groups  was  maintained  as  had  existed  prior 
to  such  advance.  When  the  5%  increase  was 
granted  by  the  Interstate  Commerce  Commission, the 
existing  basing  rate  was  advanced  to — 

100  Per  Cent  Rates 

Classes        123456 
Rates  in  Cents  per  100  Ibs 78.8      68.3      52.5      36.8       31.5      26.3 

The  rates  to  the  other  Atlantic  seaboard  points 
were  made  the  same  differentials  above  and  below 
these  basing  rates  as  were  in  effect  before  and  the 
percentage  group  rates  were  all  advanced  5%  au- 
tomatically by  advancing  the  base  rate.  > 

Principles  Involved  in  Percentage  and   Differential 

Rates 

The  reasoning  upon  which  these  percentages  rates 
are  based  may  be  summarized  as  follows : 

Broadly  the  rates  are  based  on  mileage,  modified 
by  commercial  conditions,  character  of  traffic  and 
competition,  a*nd  also  by  cost  of  service  and  the  ap- 
plication of  the  principle  of  equitable  concession. 

The  New  England  States  must  be  relieved  from 
the  strict  application  of  a  mileage  basis  on  west* 
bound  traffic  in  order  to  market  the  products  of  their 
mills  and  factories. 

On  the  lower  classes  of  westbound  traffic,  on  which 
the  transportation  charge  is  an  important  percentage 
of  the  selling  value,  they  are  only  required  to  pay  3 
cents  more  per  100  Ibs.  than  their  most  favorably 
situated  competitor;  on  the  higher  class  traffic,  on 
which  the  transportation  charges  are  not  an  import- 
ant part  of  selling  value,  they  pay  8  cents  per  100 
Ibs.  more.  They  are  able  to  force  this  concession 
because  their  railroads  originate  this  business  and 
are  thus  in  position  to  influence  rates. 


284  VALUATION  AND  RATES 

On  eastbound  business  the  rates  are  5  cents  more 
on  the  lowest  class  and  10  cents  more  on  the  higher 
class  because  (1)  the  movement  eastbound  is  con- 
fined largely  to  low  class  traffic  and  (2)  as  they  have 
no  through  line  of  their  own  extending  into  origin 
territory,  they  are  not  in  position  to  enforce  so  great 
a  concession  as  on  traffic  in  the  opposite  direction. 

The  distance  from  Milwaukee  and  the  west  bank 
Lake  Michigan  ports  as  far  north  as  Menominee  in 
Upper  Michigan,  are  greater  by  all-rail  lines  than 
the  distance  from  Chicago  to  all  eastern  points — 265 
miles  in  the  case  of  the  last  named  point  or  129%  of 
the  Chicago-New  York  basing  distance. 

The  rates  however  are  the  same  from  Menominee 
as  from  Chicago,  because  certain  lines  operate  car 
ferries  80  miles  across  Lake  Michigan  and  there  is 
water  competition  as  far  east  as  Buffalo.  The  all- 
rail  routes  must  meet  the  competition  of  Across 
Lake  Lines  and  lake  vessels  and  rates  based  on  rail- 
road mileage  cannot,  therefore,  be  applied  to  these 
west  bank  Lake  Michigan  points. 

Rates  on  traffic  to  points  on  branch  lines  in  East- 
ern territory  are  made  usually  by  a  combination  of 
the  main  line  rate  plus  the  local  rate  from  junction 
to  destination.  This  gives  a  higher  rate  per  ton-mile 
than  the  main  line  ton-mile  rate  figured  for  the  entire 
distance.  The  greater  cost  of  service  on  lines  of 
light  traffic,  as  heretofore  explained,  fully  justifies 
the  application  of  higher  rates  on  such  traffic. 

Justification  of  Eastern  Grouping 

In  the  formation  of  some  of  the  groups,  particu- 
larly the  Philadelphia  and  Baltimore  groups,  the 
Baltimore  and  Philadelphia  rates  have  been  carried 
for  considerable  distances  inland — 190  miles  in  the 
case  of  the  Baltimore  Group.  As  the  rates  to  the 
seaboard  points  are  based  on  actual  distances**,  it 


RATES  285 

gives  higher  rates  per  ton-mile  to  interior  than  to 
the  Seaboard  points. 

Such  rates  are  based  on  the  principle  of  equitable 
concession  in  part  and  on  lack  of  competition  at  the 
interior  points.  If  the  rates  to  Baltimore  were  made 
on  a  strictly  mileage  basis  at  the  same  rate  per  ton- 
mile  as  applied  to  the  first  interior  point  .located  just 
inside  of  the  western  boundary  of  the  Baltimore 
group,  the  rate  would  be  so  high  that  competitors  in 
Philadelphia,  New  York  and  Boston  would  take 
away  the  greater  part  of  the  business  of  Baltimore 
and  to  that  extent  decrease  the  amount  of  traffic  car- 
ried to  or  from  the  Baltimore  Group. 

If  the  traffic  were  decreased,  the  rates  at  the  in- 
terior point  must  be  increased,  as  charges  and  ex- 
penses would  have  to  be  spread  over  a  lessened 
traffic.  That  is  Baltimore's  commercial  position 
would  be  practically  destroyed  and  no  benefit  would 
accrue  to  the  interior  point. 

So  long  as  there  is  a  profit  in  the  Baltimore  busi- 
ness at  all  (remembering  that  it  is  a  competitive 
point),  no  injustice  is  done  the  interior  point  by 
charging  it  a  higher  rate  per  ton-mile,  as  the  profit 
on  the  Baltimore  business,  however  small,  pays  a 
part  of  the  fixed  expense  and  fixed  charge  which 
the  interior  points  must  pay  unassisted  if  no  Balti- 
more business  is  done. 

Traffic  is  less  able  to  bear  the  rate  as  distance  in- 
creases, as  heretofore  explained,  and  it  is  equitable 
that  the  point  nearer  the  market  should  bear  a  pro- 
portionately greater  burden  than  traffic  distant 
therefrom.  This  statement  of  course  is  made  on  the 
supposition  that  the  rate  to  the  interior  point  is  rea- 
sonable per  se. 

It  is,  as  a  matter  of  fact,  very  low,  being  7.7  mills 

**It  must  be  remembered  that  the  rate  per  ton -mile  is  very 
low,  however. 


286  VALUATION  AND  RATES 

per  ton-mile  on  sixth  class  traffic.  As  compared  with 
rates  to  intermediate  points  in  other  districts  than 
those  governed  by  these  Percentage  rates,  it  is  re- 
markably low.  The  fact  that  it  is  based  on  a  higher 
rate  per  ton-mile  than  the  ton-mile  rate  to  Baltimore 
is  not  proof  that  it  is  unfair. 

As  to  practically  all  of  the  rates  in  effect  between 
Central  States  and  Eastern  Territory  the  long  and 
short  haul  provision  of  the  Commerce  Act  has  not 
been  violated. 

Competition  Reduces  Value  of  Railroad  Service 

There  is  a  certain  traffic  so  circumstanced,  that  a 
portion  of  the  value  of  service  rendered  it  by  a  rail- 
road is  decreased  on  account  of  the  availability  of 
other  systems  of  transportation.  Evidently  if  a 
steamboat  line  offers  a  merchant  in  St.  Louis  a  rate 
of  32  cents  per  100  Ibs.  on  a  shipment  to  Paducah, 
Ky.,  the  value  of  service  of  the  railroad  company  is 
not  40  cents  per  100  Ibs.,  although  it  would  be  if  no 
water  transportation  were  available.  But  the  St. 
Louis  merchant,  whatever  his  ability  to  pay,  will  pay 
no  more  than  he  must. 

A  manufacturer  shipping  strawboard  from  La- 
fayette, Ind.,  to  points  on  the  east  bank  of  Lake 
Michigan  will  not  pay  the  C.  C.  C.  &  St.  L.  Ry.  a  rate 
based  on  its  mileage,  say  to  Benton  Harbor,  when 
he  can  ship  over  the  Chicago,  Indianapolis  &  Louis- 
ville Railway  at  a  rate  based  on  a  much  shorter  mile- 
age. 

If  the  Chicago,  Indianapolis  &  Louisville  Railway 
were  not  in  operation,  the  mileage  rate  of  the  C.  C. 
C.  &  St.  L.  Ry.  would  be  considered  fair,  but  the 
value  of  the  service  to  the  shipping  manufacturer  is 
no  greater  than  the  cost  of  shipping  by  the  shorter 
route.  That  is,  the  construction  of  the  Chicago,  In- 
dianapolis &  Louisville  Railway,  as  to  certain  north- 


RATES  287 

bound  shipments  from  Lafayette,  reduced  the  value 
of  service  of  the  C.  C.  C.  &  St.  L.  Ry.  from  that  point. 

There  are  two  general  conditions  of  competition 
which  affect  and  prevent  the  application  of  rates 
based  strictly  on  mileage  or  cost  of  service,  viz:  (1) 
On  traffic  between  two  points  served  by  more  than 
one  road,  one  of  which  is  shorter  than  the  other — 
that  is  where  one  has  a  direct  and  the  other  a  cir- 
cuitous route.  (2)  On  traffic  between  two  points 
served  by  both  railroad  and  water  transportation  in 
whole  or  in  part. 

Making  rates  for  such  traffic  involves  at  times 
charging  less  for  a  longer  than  a  shorter  haul,  when 
the  latter  is  included  within  the  former.  The  follow- 
ing discussion  relates  to  the  economic  principles  in- 
volved in  such  rates. 

\ 

Circuitous  Routes 

The  discussion  of  this  subject  will  be  aided  by  an 
illustration  of  an  actual  rate  situation: 

The  distance  from  Lafayette,  Ind.,  to  Benton  Har- 
bor, Mich,  (see  map),  by  the  Chicago,  Indianapolis 
&  Louisville  Railway  and  the  Pere  Marquette  Rail- 
road, jointly,  is  122  miles;  the  distance  between  the 
same  two  points  by  the  C.  C.  C.  &  St.  L.  Ry.  is  265 
miles. 

There  is  a  considerable  traffic  from  Lafayette  to 
Michigan  points  in  various  manufactured  products 
taking  sixth  class  or  lower  rates.  In  order  to  facili- 
tate the  following  discussion,  the  sixth  class  rates 
will  be  used. 

The  following  table  shows  the  present  sixth  class 
rates  and  distances  from  Lafayette  and  other  points 
to  Benton  Harbor. 


Wild 
San  jererre 


4-  VJBelfJst^ 5-<N^J?  oJMlsha^a 
)t?8     '    fc^^  \feoutfiBenc 


^-  ^ 
'Jorth  Judsou4' 


Mondn        BooneN 


Hoovei 

^^^ 

^Trimmer!  VNL —       *• 


^»fec"' 


RATES  289 

DISTANCES  AND  RATES  TO  BENTON  HARBOR 

Distance     Rate  in  cts.      v 
FROM  Miles       per  100  Ibs. 

Lafayette  via  C.  I.  &  L.-P.  M 122  8.9 

Lafayette  via  C.  C.  C.  &  St.  L 265  8.9 

Indianapolis  via  C.  C.  C.  &  St.  L.  .200  9.5 

Marion  via  C.  C.  C.  &  St.  L 131  8.9 

Traffic  moved  by  the  C.  C.  C.  &  St.  L.  Ry.  from 
Lafayette  to  Benton  Harbor  passes  through  In- 
dianapolis and  Marion.  The  distance  from  Lafayette 
to  Benton  Harbor  is  65  miles  greater  and  the  rate 
0.6  cents  per  100  Ibs.  less  than  the  rate  from  In- 
dianapolis to  Benton  Harbor ;  in  fact  the  rate  on  the 
last  134  miles  (that  is  after  passing  Marion)  of  the 
C.  C.  C.  &  St.  L.  up  to  Lafayette  is  greater  by  0.6 
cent  per  100  Ibs.  than  the  Lafayette  rate. 

On  a  ton-mile  basis,  the  rates  from  the  several 
points  to  Benton  Harbor  are : 

Cents  per  ton-mile. 

Lafayette  via  C.  I.  &  L.-P.  M 1.46 

Lafayette  via  C.  C.  C.  &  St.  L 0.67 

Indianapolis 0.95 

Marion 1.36 

The  table  shows  that  on  the  same  commodities, 
moved  over  the  same  tracks,  a  rate  of  0.67  cents  per 
ton-mile  is  charged  on  traffic  from  Lafayette  to  Ben- 
ton  Harbor  moving  through  Indianapolis,  while  traf- 
fic originating  at  Indianapolis  sent  to  the  same  desti- 
nation, is  charged  a  rate  of  0.95  cents  per  ton-mile. 
Can  such  rates  be  justified? 

Effect  of  Rates  on  Various  Interests 

There  are  three  interests  to  consider:  the  In- 
dianapolis shippers,  the  Public  and  the  Railroad 
Company.  A  comparison  of  the  rate  from  Indianap- 
olis with  those  from  Lafayette  (by  the  shorter  line) 


290  VALUATION  AND  RATES 

and  Marion  shows  a  ton-mile  rate  less  from  Indianap- 
olis than  from  the  last  two  points,  which  is  normal 
as  the  distance  hauled  is  longer. 

On  the  basis  of  the  standard  mileage  scale*  ap- 
plying in  this  territory,  the  rates  per  ton-mile  on 
sixth  class  trafficTfrom  these  several  points  to  Benton 
Harbor  would  be — 

Cents  per  ton-mile. 

Lafayette  via  C.  I.  &  L.-P.  M 1.46 

Lafayette  via  C.  C.  C.  &  St.  L 0.84 

Indianapolis 1.00 

Marion 1.36 

It  will  be  seen  from  this  table,  that  the  rates  from 
Indianapolis  to  Benton  Harbor  are  0.05  cents  per  ton- 
mile  less  than  the  average  rate  per  ton-mile  for  this 
distance  in  this  territory. 

So  far  as  the  rate  from  Indianapolis  itself  is  con- 
cerned, then,  it  seems  fair  by  comparison  and  the 
Indianapolis  shipper  has  no  just  cause  for  complaint. 

As  to  the  railroad  company,  considered  as  addi- 
tional business,  the  traffic  is  moved  at  a  profit,  though 
much  below  the  normal  profit.**  If  all  of  its  sixth 
class  business  from  stations  between  Lafayette  and 
Benton  Harbor  were  hauled  at  rates  per  ton-mile  as 
low  as  this  rate  from  Lafayette  to  Benton  Harbor,  its 
transportation  would  involve  a  loss.  Or,  if  the  sixth 
class  traffic  between  Lafayette  and  Benton  Harbor 
were  charged  its  full  proportion  of  the  fixed  charges 
and  fixed  expense,  on  the  basis  of  tonnage,  the 
transaction  would  show  a  loss.  As  such  charges  and 
expenses  are  incurred  whether  the  business  is  done 
or  not,  the  transaction  is  as  a  matter  of  fact  profita- 


*Central  Freight  Association  mileage  scale. 

**The  fixed  charge  for  interest  and  34  per  cent  of  operating 
expense  which  is  fixed,  will  not  be  included  in  cost  when  the 
rate  is  to  be  made  on  the  basis  of  out-of-pocket  expense. 


RATES  291 

ble  and  in  consequence  justified  from  the  standpoint 
of  cost  to  the  railroad. 

It  is  in  the  interest  of  the  public  that  as  many  dif- 
ferent transportation  routes  as  possible  be  availabler 
for  even  if  no  reduction  in  rate  may  be  obtained 
thereby,  the  service  is  improved  by  competition. 

N. 

Principles  Involved  in  Rates  Over  Circuitous  Routes 

The  principles  involved  in  the  making  of  such 
rates  are: 

(1)  When  the  traffic  between  two  given  points 
may  be  carried  over  two  or  more  routes,  the  shorter 
route  will  determine  the  rate,  and  in  consequence 
the  longer  route  must  perform  its  service  at  less 
revenue  per  ton-mile  than  the  normal  charge  for  its 
traffic  as  a  whole. 

The  limiting  factor  in  the  application  of  this  prin- 
ciple is,  that  the  revenue  received  from  the  traffic 
must  in  all  cases  exceed  the  actual  additional  cost 
which  its  movement  involves,  in  order  that  the  traffic 
as  a  whole  shall  not  bear  the  burden  of  a  particular 
service  performed  at  a  loss. 

(2)  If  in  the  application  of  the  first  principle, 
rates  from  intermediate  points  to  the  same  destina- 
tion are  higher  than  from  the  more  distant  point, 
such  a  fact  is  not  in  itself  proof  that  the  rates  from 
intermediate  points  are  unfair. 

The  fairness  of  the  rate  from  the  intermediate 
points  should  be  determined  by  comparison  with 
other  points  similarly  situated  and  the  normal  rate 
for  the  territory  as  a  whole.  If  such  comparison 
shows  the  rate  to  be  fair  in  itself,  the  fact  that  the 
carrier  performs  a  more  costly  service  at  another 
point  for  a  smaller  compensation,  works  no  injustice 
to  the  intermediate  point,  and  the  carrier  should  not 
be  deprived  of  the  profit,  however  small,  of  doing 
the  additional  business,  nor  the  terminal  point  of  the 


292  VALUATION  AND  RATES 

benefit  which  it  obtains  through  such  competitive 
service. 

Water  Competition 

Competition  between  water  and  rail  systems  of 
transportation  affects  rates  in  certain  territories  very 
materially.  The  most  important  instances  from  the 
standpoint  of  volume  of  traffic  are : 

Between  points  on  large  navigable  rivers,  such  as 
the  Ohio  and  Mississippi. 

Between  points  situated  on  the  Great  Lakes  and 

Between  points  both  of  which  are  sea  ports  and 
but  the  traffic  between  which  is  moved  by  a  combina- 
tion lake  and  rail  route. 

Between  points  both  of  which  are  sea  ports  and 
between  points  one  of  which  is  a  sea  port  and  the 
other  an  inland  point  which  may  be  served  by  an  all- 
rail  route  or  a  combination  water  and  rail  route. 

So  far  as  economic  principles  are  concerned,  they 
are  much  the  same  in  either  of  these  three  circum- 
stances. Illustrations  of  River,  Lake  and  Ocean  com- 
petitive rates  will  be  given  to  show  the  basis  and 
reasoning  upon  which  they  rest. 

Fundamental  Differences  Between  Rail  and  Water 
Transportation 

There  are  certain  fundamental  differences  in  the 
economics  of  railroad  and  water  transportation  to 
which  attention  should  be  called  before  going  into 
the  discussion. 

A  railroad  must  construct  a  roadway,  furnish 
equipment,  maintain  both  of  them  and  operate  trains 
to  move  the  traffic.  Its  rate  schedule  as  a  whole 
must  pay  the  fixed  charges  (interest)  on  the  cost  of 
roadway  and  equipment,  the  cost  of  maintaining 
them  and  the  cost  of  conducting  the  transportation. 

River,  Lake  and  Ocean  lines  of  transportation  fur- 
nish the  vessel  (equipment)  and  maintain  and  op- 


RATES  293 

erate  it.  Their  rate  schedules  as  a  whole  must  pay 
interest  on  the  cost  of  the  vessel  and  cost  of  main- 
taining and  operating  it,  and  in  addition  wharfage 
or  dockage  for  receiving  and  discharging  freight. 

Nature  has  furnished  the  roadway  in  greater  part 
and  the  government  has  improved  it  by  constructing 
locks  and  harbors  and  dredging  shallow  channels, 
which  it  also  maintains  at  the  expense  of  the  country 
as  a  whole.  That  is,  water-born  traffic  bears  no 


rviver    competition 

The  largest  river  traffic  in  this  country  is  that  car- 
ried by  the  Ohio  and  Mississippi  Rivers,  and  cities 
and  towns  located  on  or  near  these  streams  usually 
enjoy  lower  transportation  rates  than  those  not  so 
favorably  situated. 

Railroads  connecting  two  points,  both  of  which  are 
on  navigable  streams,  have  to  meet  competition  from 
water  transportation  as  to  the  terminals,  while  to 
points  intermediate  thereto  there  is  no  such  competi- 
tion. The  traffic  between  Cincinnati  and  other  Ohio 


"The  tolls  for  the  use  of  the  Panama  Canal  is  one  exception 
to  this  general  statement. 


292  VALUATION  AND  RATES 

benefit  which  it  obtains  through  such  competitive 
service. 

Water  Competition 

Competition  between  water  and  rail  systems  of 
transportation  affects  rates  in  certain  territories  very 
materially.  The  most  important  instances  from  the 
standpoint  of  volume  of  traffic  are : 

Between  points  on  large  navigable  rivers,  such  as 
the  Ohio  and  Mississippi. 


Errata 

The  third  paragraph  under  the  caption  "Water 
Competition"  on  page  292  should  read: 

Between  points  situated  on  the  Great  Lakes  and 
between  points  neither  of  which  are  on  the  Lakes 
but  the  traffic  between  which  is  moved  by  a  combina- 
tion lake  and  rail  route. 


Transportation 

There  are  certain  fundamental  differences  in  the 
economics  of  railroad  and  water  transportation  to 
which  attention  should  be  called  before  going  into 
the  discussion. 

A  railroad  must  construct  a  roadway,  furnish 
equipment,  maintain  both  of  them  and  operate  trains 
to  move  the  traffic.  Its  rate  schedule  as  a  whole 
must  pay  the  fixed  charges  (interest)  on  the  cost  of 
roadway  and  equipment,  the  cost  of  maintaining 
them  and  the  cost  of  conducting  the  transportation. 

River,  Lake  and  Ocean  lines  of  transportation  fur- 
nish the  vessel  (equipment)  and  maintain  and  op- 


RATES  293 

erate  it.  Their  rate  schedules  as  a  whole  must  pay 
interest  on  the  cost  of  the  vessel  and  cost  of  main- 
taming  and  operating  it,  and  in  addition  wharfage 
or  dockage  for  receiving  and  discharging  freight. 

Nature  has  furnished  the  roadway  in  greater  part 
and  the  government  has  improved  it  by  constructing 
locks  and  harbors  and  dredging  shallow  channels, 
which  it  also  maintains  at  the  expense  of  the  country 
as  a  whole.  That  is,  water-born  traffic  bears  no 
burden*  of  interest  on  the  cost  of  constructing  or  of 
operating  expense  in  maintaining  a  roadway,  while 
the  railroad  traffic  does,  and  in  consequence  the 
former  has  an  advantage  in  cheapness  over  railroad 
traffic. 

On  the  other  hand,  the  service  of  the  railroads  is 
superior  to  that  of  water  routes  in  speed,  safety  and 
regularity.  Ice  in  the  rivers  and  lakes  causes  prac- 
tically total  suspension  of  water  transportation  dur- 
ing the  winter  months,  as  to  the  greater  part  of 
water  traffic — five  months  in  the  case  of  the  Great 
Lakes — and  storms  and  accidents  at  sea  are  incident 
to  ocean-born  traffic,  causing  delays  and  affecting 
the  safety  of  the  transportation. 

River   Competition 

The  largest  river  traffic  in  this  country  is  that  car- 
ried by  the  Ohio  and  Mississippi  Rivers,  and  cities 
and  towns  located  on  or  near  these  streams  usually 
enjoy  lower  transportation  rates  than  those  not  so 
favorably  situated. 

Railroads  connecting  two  points,  both  of  which  are 
on  navigable  streams,  have  to  meet  competition  from 
water  transportation  as  to  the  terminals,  while  to 
points  intermediate  thereto  there  is  no  such  competi- 
tion. The  traffic  between  Cincinnati  and  other  Ohio 

*The  tolls  for  the  use  of  the  Panama  Canal  is  one  exception 
to  this  general  statement. 


294  VALUATION  AND  RATES 

River  Crossings  and  New  Orleans,  and  other  Missis- 
sippi River  points  is  very  important.  The  rates  to 
intermediate  points,  from  the  Ohio  River  Crossings 
are  higher  than  to  the  terminal  Mississippi  River 
points. 

.     Rates  Between  St.  Louis  and  Paducah,  Ky. 

The  following  illustration  of  this  class  of  rates  is 
given  on  account  of  its  simplicity. 


The  Illinois  Central  Railroad  operates  a  line  be- 
tween St.  Louis  on  the  Mississippi  River  and  Padueah, 
Ky.,  on  the  Ohio  River.  A  line  of  steamboats  op- 
erates regularly  between  the  same  points.  The  dis- 
tance and  rates  between  St.  Louis  and  several  points 


RATES  295 

on  the  Illinois  Central  line  are  shown  by  the  follow- 
ing table : 

FROM  St.  Louis 

First  class 
Miles  Rates 

TO  Cents  per  100  Ibs. 

Marion,  111 113  33.9 

Parker,  111 128  35.9 

Metropolis,  111. . . 160  36.0 

Brookport,  111 166  36.0 

Paducah,  Ky 171  36.0 

Paducah  rate  in  effect  for  comparative  purposes.34.0 

The  rate  to  Paducah  includes  a  transfer  charge  at 
the  Ohio  River  of  2  cents,  which  should  be  deducted 
from  the  actual  rate  in  effect  for  the  purpose  of  com- 
parison with  rates  based  on  distance. 

It  will  be  seen  from  the  table,  that  the  charge  for 
moving  the  same  commodity  over  the  same  rails  is 
practically  the  same  for  a  distance  of  171  miles  as 
for  a  distance  of  113  miles  and  that  it  is  nearly  2 
cents  less  than  the  rate  to  Parker,  whose  distance 
from  St.  Louis  is  43  miles  less. 

The  normal  rate  to  Paducah,  on  the  basis  of  the 
Illinois  distance  scale,  plus  the  transfer  charge  at 
the  Ohio  River,  would  be  40.9  cents.  To  meet  the 
river  competition,  the  railroad  rate  has  been  made 
12%  less  than  the  normal  rate. 

But  the  rates  to  the  intermediate  points  are  fair, 
being  on  the  same  basis  as  all  other  points  in  the 
State  of  Illinois  where  the  conditions  are  the  same. 
Paducah,  and  the  other  rivers  points,  enjoy  the  lower 
rate  by  reason  of  natural  advantages,  which  the  rail- 
road is  not  called  upon  to  adjust.  On  the  basis  of 
value  of  service,  the  fact  that  water  competition  is 
available  at  Paducah  has  reduced  the  value  of  the 
service  rendered  by  the  railroad  at  Paducah. 


296  VALUATION  AND  RATES 

If  the  railroad  were  compelled  to  place  Paducan 
and  Marion  on  the  basis  prescribed  by  the  Illinois 
distance  scale,  it  could  get  none,  or  only  a  small  part, 
of  the  business  at  Paducah,  as  the  river  rate  is  lower 
than  the  distance  scale  rate.  What  benefit  would 
Marion  derive  from  the  fact  that  the  railroad  could 
get  none  of  the  Paducah  business? 

If,  in  order  to  get  the  Paducah  business,  the  rates 
to  all  intermediate  points  between  St.  Louis  and  Pa- 
ducah were  reduced  12%  below  the  rates  prescribed 
by  the  Illinois  distance  scale  (the  same  percentage 
the  Paducah  rate  has  been  reduced  to  meet  the  com- 
petition), such  rates  would  be  below  the  normal 
rates  of  the  territory  and  below  the  cost  of  service, 
which  condition  would  force  the  railroad  to  forego 
the  Paducah  business. 

The  conditions  are  much  the  same  as  those  attend- 
ing that  portion  of  the  Lafayette-Benton  Harbor 
traffic  which  is  moved  over  a  circuitous  route,  viz: 
that  the  rates  to  the  intermediate  points  being  fair, 
as  compared  with  rates  in  the  same  territory  between 
points  similarly  situated,  no  injustice  is  done  the  in- 
termediate point  because  an  equal  or  greater  service 
has  been  performed  for  a  terminal  competitive  point 
at  a  lower  rate. 

As  to  this  feature  of  natural  advantages,  men- 
tioned above,  a  paragraph  in  the  decision  of  the  In- 
terstate Commerce  Commission,  in  Baltimore  Cham- 
ber of  Commerce  vs.  Baltimore  &  Ohio  Railroad — 
I.  C.  C.  Reports  Vol.  XXII,  page  603, — is  interesting: 

"It  is  not  within  the  power  of  this  Commission  to 
equalize  economic  conditions  or  to  place  one  market 
in  a  position  to  compete  on  equal  terms  with  another 
market  as  against  natural  advantages.  *  *  * 
The  requirements  of  the  law  are,  that  transportation 
rates  must  be  reasonable  and  must  not  be  unjustly 
discriminatory  or  give  undue  preference." 


RATES  297 

Ohio-Mississippi  River  Coal  Traffic 

The  railroads  can  not  usually  meet  water  competi- 
tion as  to  certain  traffic  of  considerable  volume  be- 
tween points  located  directly  on  the  large  navigable 
rivers.  Coal  from  the  Pittsburgh  district  to  all 
points  on  the  Ohio  and  Mississippi  Rivers  is  deliv- 
ered by  barge  at  perhaps  lower  costs  for  transporta- 
tion per  ton-mile  than  any  other  traffic  in  the  world. 

Immense  fleets  of  barges  are  floated  down  during 
the  freshets  in  the  Ohio  River,  one  tow-boat  and 
crew  handling  as  much  as  25,000  tons  in  one  fleet. 
The  government  engineers  have  reported  the  cost* 
of  such  transportation  to  be: 

Pittsburgh  to  Louisville — present  freshet  system — 
empty  barges  returned  to  Pittsburgh,  0.76  mills  per 
ton-mile. 

Pittsburgh  to  New  Orleans — present  freshet  sys- 
tem— empty  barges  not  returned,  but  including  their 
cost  in  the  cost  of  transportation,  0.68  mills  per  ton- 
mile. 

The  estimated  cost,  after  the  completion  of  the 
improvements  in  the  Ohio  River,  now  under  con- 
struction, which  will  give  a  minimum  depth  of  water 
of  nine  feet,  is  0.4  mills  per  ton-mile  from  Pittsburgh 
to  both  Louisville  and  New  Orleans. 

This  does  not  mean  that  the  railroads  can  not  ship 
coal  into  Louisville  and  New  Orleans,  for  as  a  matter 
of  fact,  they  do  so  in  large  quantities.  At  the  present 
time,  on  account  of  the  shallow  channel  in  the  upper 
Ohio  River,  the  coal  can  come  from  Pittsburgh  only 
when  that  river  is  at  flood  heights,  which  occurs 
usually  once  a  year  and  lasts  for  a  short  time  only. 

So  far  as  the  railroads  are  concerned  however, 
their  tonnage  into  the  points  located  on  the  river  is 
reduced  by  whatever  tonnage  the  coal  mines  located 

*  Engineering   News,   February   17,    1910. 


298  VALUATION  AND  RATES 

on  the  river  are  able  to  ship  by  barge,  and  their  rates 
per  ton-mile  on  coal  shipped  to  these  river  points,  ex- 
cept where  coal  mines  are  located  near  such  points, 
are  necessarily  low,  in  order  to  compete  with  the 
river-born  coal  carried  at  such  low  rates. 

Lake  Competition 

A  very  large  portion  of  Lake  commerce  consists  of 
iron  ore  shipped  from  Minnesota  and  Upper  Mich- 
igan to  ports  at  the  foot  of  Lake  Michigan  and  on  the 
south  and  east  shores  of  Lake  Erie.  The  vessels 
carrying  this  traffic  return  with  coal  cargoes  for 
north  and  northwest  territories. 

The  railroads,  on  the  larger  part  of  this  traffic,  ob- 
tain hauls  to  and  from  interior  points  to  the  Lakes. 
Practically  none  of  it,  however,  is  moved  by  rail  en- 
tirely from  point  of  origin  to  destination. 

It  is  an  instance  of  water  transportation  being  so 
much  cheaper  than  rail  transportation,  that  the  rail- 
roads can  not  carry  the  traffic  in  competition  except 
at  a  loss,  having  to  abandon  a  large  traffic  to  a 
cheaper  system  of  transportation  on  account  of  the 
natural  advantages  attached  to  it. 

The  conditions  surrounding  this  traffic  are  pecu- 
liarly favorable  to  water  transportation.  The  volume 
is  very  great  and  justifies  large  expenditures  for 
plants  for  economically  loading  and  unloading  at 
points  where  transfer  from  railroad  to  vessel  or  ves- 
sel to  railroad  is  required,  and  in  addition  the  vessels 
are  fully  loaded  with  ore  from  the  mines  in  the  North 
and  Northwest  and  with  coal  from  the  east  for  the 
North  and  Northwest,  in  returning. 

To  a  limited  extent,  the  same  is  true  of  the  traffic 
in  lumber  from  northern  to  eastern  lake  ports.  Rates 
on  lumber,  via  Lake  from  Ashland  Bay  ports  (near 
Duluth),  to  Lake  Erie  ports,  as  far  east  as  Buffalo 
and  Tonawanda,  are  7.5  cents  per  100  Ibs.,  while 


RATES  299 

the  rail  rate  from  the  same  ports  to  Buffalo  is  24 
cents  per  100  Ibs.  During  the  season  of  open  navi- 
gation on  the  Lakes,  such  lumber  will  of  course  move 
only  by  Lake  routes. 

On  traffic  shipped  via  rail  and  lake  routes  between 
the  lake  ports  of  Chicago,  Milwaukee,  Manitowoc, 
Wis.,  and  Gladstone,  Mich.,  on  the  one  hand,  and 
New  York,  on  the  other,  the  rates  are  lower  than  all- 
rail  rates  by  the  following  amounts: 

Classes  123456 

East  Bound          Cents  per  100  Ibs.  12      10        7        5        4        4 
West  Bound         Cents  per  100  Ibs.  13       11        9         5         5         4 

Between  these  lake  ports  and  the  other  Atlantic 
sea-ports  the  same  differentials  apply  as  in  all-rail 
traffic.  The  rates  to  points  in  Illinois  such  as  Peoria, 
Joliet,  Streator  and  St.  Louis,  Mo.,  St.  Paul,  Duluth 
and  Upper  Michigan  points,  Cleveland,  Detroit  and 
Lake  Erie  points,  are  adjusted  in  relation  to  each 
other,  the  rates  being  made  by  deducting  certain 
arbitraries  from  all-rail  rates,  as  in  the  case  between 
Chicago  and  New  York  stated  above. 

The  effect  of  lake  competition  on  all-rail  traffic 
between  eastern  and  western  territories  has  been 
minimized  for  some  years  past  by  the  fact  that  the 
railroad  companies  have  maintained  Lake  lines  op- 
erated in  connection  with  their  own  systems  of  rails. 

The  Interstate  Commerce  Commission  have  or- 
dered the  discontinuance  of  this  practice  and  it  will 
be  interesting  to  note  what  effect  this  will  have  on 
Rail-and-Lake  rates.  Inasmuch  as  the  railroads  own 
large  dock  frontage  at  all  important  lake  ports,  and 
as  all  frontage  is  fully  occupied  at  many  of  them,  and 
of  the  further  fact  that  the  lake  carrier,  for  most  of 
the  traffic  is  between  two  rail  carriers,  it  is  doubtful 
if  the  enforced  abandonment  of  lake  traffic  by  the 
railroads  will  affect  rail  and  lake  rates  radically. 


300  VALUATION  AND  RATES 

Principle  of  Natural  Advantages 

The  differentials  allowed  rail  and  lake  traffic,  be- 
low the  all-rail  rates,  is  simply  a  recognition  of  the 
principle  that  the  presence  of  competition  of  cheaper 
transportation  takes  away  a  portion  of  the  value  of 
railroad  service.  That  is,  railroads  in  certain  situa- 
tions must  make  concessions  in  rates,  and  in  some 
instances  forego  the  transportation  of  certain  traffic 
altogether,  on  account  of  natural  conditions,  just  as 
intermediate  points  must  pay  higher  freight  rates 
than  points  more  advantageously  situated  as  to  trans- 
portation facilities.  The  principle  of  natural  advan- 
tages works  both  ways,  "sauce  for  the  goose  is  sauce 
for  the  gander." 

Ocean  Competition 

The  movement  of  traffic  between  sea  ports  is  very 
generally  by  water  routes,  as  to  the  greater  part  of 
the  tonnage,  as  it  is  in  river  and  lake  traffic.  The 
traffic  by  ocean  and  rail  is  practically  the  same  as 
that  of  lake  and  rail  just  described. 

The  traffic  between  the  Atlantic  and  Pacific  Sea- 
board is  however,  a  very  important  exception,  and 
consideration  of  the  Trans-Continental  railroad  rates, 
in  connection  with  the  water  rates,  will  be  profitable 
in  any  discussion  of  rate  economics,  as  some  factors 
of  rate  making  are  involved  which  do  not  appear  in 
the  previous  discussion. 

In  the  following  discussion,  reference  should  be 
made  to  the  maps,  "Territorial  Groupings  for  Trans- 
Continental  Rates"  and  "Map  of  Zones"  for  an  un- 
derstanding of  the  text.  The  facts  next  stated  are 
taken  from  Interstate  Commerce  Commission  Reports 
Volume  XXXII,  Pages  612-658,  and  Volume  XXI, 
Page  425. 

Various  trans-continental  carriers  prior  to  Feb- 
ruary 11,  1911,  filed  with  the  Commission  applica- 


RATES 


301 


302  VALUATION  AND  RATES 

tions  for  relief  from  the  Fourth  Section  (Long  and 
Short  Haul  Section  of  the  Commerce  Act)  as  to  rates 
on  commodities  from  eastern  territories  to  Pacific 
Coast  terminals  and  intermediate  points.  The  appli- 
cations asked  authority  to  continue  the  then  current 
practice  of  making  commodity  rates  to  the  Pacific 
Coast  lower  than  to  intermediate  points.  The  car- 
riers sought  to  show  that  all  commodity  rates  from 
all  territory  of  origin  were  influenced  by  the  compe- 
tition of  water-and-rail  carriers  operating  from  the 
east  coast  of  the  United  States  by  water  to  the  Isth- 
mus of  Tehuantipec,  by  rail  across  the  isthmus  and 
thence  by  water  to  the  Pacific  Coast. 

For  the  purpose  of  discussing  the  situation  in  dis- 
posing of  these  cases,  the  Commission  divided  the 
United  States  into  the  five  zones  shown  on  the  map. 

The  decision  of  the  Commission  stated  the  reason- 
ing upon  which  it  was  based  as  follows* : 

Competition  Must  Be  Reasonably  Possible** 

(1)  "Looking  at  this  whole  situation  and  endeav- 
oring to  justly  consider  the  interests  of  all  parties 
affected,  including  the  carriers,  we  are  of  the  opinion 
that  from  Zone  1,  no  higher  charge  can  justly  be 
made  to  any  intermediate  point  than  to  a  more  dis- 
tant point. 

"The  eastern  limit  of  this  territory  is  approxi- 
mately 1,500  miles  from  the  Atlantic  seaboard,  al- 
most midway  between  the  Pacific  and  Atlantic 
oceans.  No  traffic  has  ever  been,  and  none  probably 
ever  will  be  transported  from  this  section  to  the  At- 
lantic coast  and  thence  by  water  to  the  Pacific  Coast. 
Giving  full  weight  to  the  effect  of  competition  of  all 


•I.  C.  C.    Vol.  21.     Page  425— City  of  Spokane  vs.  N.  P.  R.  R. 

**Headings  are  the  author's. 

**Blackface  type  used  in  the  text  shows  the  emphasis  of  the 
author  of  this  book.  This  is  to  be  remembered  in  reading  quota- 
tions from  opinions  of  the  Commission. 


RATES  303 

kinds,  we  can  find  no  justification  for  a  system  of 
rates  which  maintains  from  this  territory  a  higher 
charge  to  any  interior  points  than  is  made  to  the 
coast." 

"With  respect  to  territory  embraced  in  Zone  2  the 
case  stands  somewhat  different.  This  zone  com- 
prises the  Mississippi  Valley  and  a  considerable  por- 
tion of  the  great  manufacturing  area  of  the  west. 
It  lies  400  miles  nearer  the  Atlantic  seaboard,  with 
which  it  is  connected,  in  part  at  least,  by  lines  of  rail- 
road affording  the  cheapest  transportation  service 
in  any  part  of  the  country.  Still  there  never  has 
been  and  there  probably  never  will  be  in  the  future 
any  considerable  movement  of  traffic  from  this  ter- 
ritory to  the  Pacific  Coast  by  way  of  the  Atlantic 
seaboard. 

"We  are  of  the  opinion  that  rates  from  this  terri- 
tory to  intermediate  points  may  properly  exceed  by 
not  more  than  7  per  cent  rates  from  the  same  points 
of  origin  to  Pacific  Coast  terminals. 

"From  Zone  3  there  is  still  greater  possibility  of 
actual  transportation  competition  on  business  des- 
tined to  Pacific  Coast  points,  although  from  this  sec- 
tion hitherto  the  actual  movement  has  been  only  oc- 
casional. 

"We  are  of  the  opinion,  that  from  points  of  origin 
in  this  territory,  rates  to  intermediate  points  may 
properly  exceed  those  to  terminal  points  by  not  more 
than  15  per  cent. 

"In  the  past  the  actual  movement  from  eastern 
points  of  origin  to  Pacific  coast  terminals  has  been 
mainly  confined  to  Zone  4,  and  even  in  this  zone  the 
greater  part  of  the  traffic  has  originated  in  or  near 
the  seaboard  itself. 

"The  force  of  water  competition  is  greatest  at  New 
York  and  gradually  diminishes  as  the  distance  from 
New  York  increases,  but  we  are  of  the  opinion  that 


304  VALUATION  AND  RATES 

this  entire  territory  may  properly  be  treated  as  a 
single  group,  and  that  rates  from  points  of  origin 
within  its  limits  to  intermediate  points  may  properly 
exceed  those  to  terminal  points  by  not  more  than 
25  per  cent. 

"No"  opinion  is  expressed  at  this  time  as  to  Zone  5, 
since  rates  from  that  territory  are  not  involved  in 
these  proceedings. 


Basis  of  Application  for  Relief   From  Fourth 
Section** 

The  carriers  in  July,  1914,  asked  for  a  further 
hearing  concerning  certain  commodities  enumerated 
in  a  schedule  (designated  "C")*  it  being  their  pur- 
pose to  show  that  "as  to  these  rates  conditions  justify 
a  greater  degree  of  relief  than  is  afforded  under  the 
original  order." 

(2)     It  was  asserted  by  the  petitioners: 

1.  "That   the    commodities   named    originate    in 
large  volume  on  the  Atlantic  Seabord. 

2.  "That  these  commodities  are  adapted  to  water 
transportation,   and  in  fact  move  in   considerable 
quantities  from  the  Atlantic  seaboard  to  the  Pacific 
coast  by  water. 

3.  "That  the  rates  made  by  the  water  carriers 
on  these  commodities  are  extremely  low  and  necessi- 
tate correspondingly  low  rates  by  the  rail  carriers 
from  eastern  seaboard  territory. 

4.  "That  the  low  rate  so  imposed  from  the  eastern 
seaboard  to  the  Pacific  coast  necessitate  correspond- 
ingly low  rates  from  the  Buffalo,  Detroit,  Chicago, 

"*Fourth  section  of  Commerce  Act,  which  forbids  charging 
more  for  a  short  haul  than  for  a  longer  one — the  shorter  being 
included  within  the  longer. 

*Schedule  "C"  contains  a  list  of  about  2,000  items  which  are 
shown  as  an  appendix  to  the  decision  of  the  commission. 


RATES  305 

St.  Louis,  and  Missouri  River  territories;  (a)  in  order 
to  permit  the  rail  movement  of  traffic  from  these 
points  to  the  Pacific  coast  in  competition  with  the 
same  or  similar  commodities  moving  from  the  At- 
lantic seaboard;  (b)  in  order  to  comply  with  the 
requirements  of  the  fourth  section  which  prohibits 
carriers  from  making  a  greater  charge  from  inter- 
mediate points  than  from  more  distant  points,  the 
more  distant  points  in  this  case  being  located  at  or 
near  the  Atlantic  seaboard. 

5.  "That  since  the  opening  of  the  Panama  Canal 
the  water  carriers  have  materially  reduced  their 
rates,  shortened  the  time  for  transportation,  in- 
creased the  frequency  of  their  sailings,  and  materi- 
ally added  both  to  their  tonnage  capacity  and  to 
the  actual  tonnage  obtained. 

"The  shipping  interests  of  the  intermountain  ter- 
ritory oppose  the  application  for  further  relief,  some 
upon  the  ground  that  the  relief  afforded  by  Fourth 
Section  Order  No.  124  is  sufficient;  others  upon  the 
ground  that  the  carriers  have  not  proposed  any  new 
basis  of  rates  to  the  intermediate  points,  the  present 
rates  to  which  they  allege  to  be  unreasonable  and 
unjustly  discriminatory. 

Shippers  Support  Application  of  the  Railroads 

The  application  is  supported  by  shipping  interests 
in  Chicago,  Duluth,  Minneapolis,  St.  Paul,  St.  Louis, 
and  the  Missouri  River  cities,  upon  the  ground  that, 
if  further  relief  be  not  afforded  to  the  carriers  upon 
this  traffic,  the  present  policy  of  the  carriers  of  main- 
taining rates  from  intermediate  territory  to  the  Paci- 
fic Coast  no  higher  than  from  the  Atlantic  seaboard 
will  be  defeated  and  the  business  built  up  by  these 
interior  shipping  interests  with  purchasers  upon  the 
Pacific  Coast  will  be  diverted  to  the  advantage  of 
industries  near  the  Atlantic  seaboard.  *  *  *  " 


306 


VALUATION  AND  RATES 


RATES  307 

In  connection  with  the  third  allegation  of  the  car- 
riers, the  following  table  shows  for  certain  commod- 
ities, sea  rates  prior  to  the  opening  of  the  Panama 
Canal,  sea  rates  subsequent  to  such  opening,  the  all- 
rail  rate  then  in  effect,  the  proposed  all-rail  rate,  and 
the  tonnage  moved  by  sea  and  rail  lines  from  Terri- 
tories A  and  B,  as  shown  on  map  "Territorial  Group- 
ings for  Transcontinental  Traffic." 

The  table  shows  that  the  proposed  all-rail  rate 
was  materially  higher  than  the  ocean  rate  in  nearly 
every  instance,  the  difference  being  so  great  as  to 
turn  a  large  percentage  of  the  traffic  to  boat  lines. 
They  could  not  have  been  materially  higher  from 
Territories  A  and  B  if  the  rail  lines  were  to  retain 
any  considerable  percentage  of  the  traffic.  This  es- 
tablishes the  third  allegation  of  the  carriers. 

Low  Rates  From  Sea-board  Necessitate  Low  Rates 
From  Interior  Points 

As  to  the  fourth  allegation,  that  the  low  rates  from 
the  eastern  seaboard  to  the  Pacific  Coast  necessitate 
correspondingly  low  rates  from  Buffalo,  Detroit,  Chi- 
cago, St.  Louis  and  Missouri  River  territories,  the 
argument  of  the  Commission  is: 

(3)  "The  carriers  are  not  asking  authority  to 
make  lower  rates  from  the  Atlantic  seaboard  than 
from  intermediate  points,  for  the  very  obvious  reason 
that  were  the  rates  so  adjusted  the  Pacific  Coast 
would  soon  be  supplying  itself  from  the  Atlantic  sea- 
board with  many  of  the  articles  which  are  at  present 
shipped  from  the  interior  territory.  *  *  * 

What  interest  would  be  served  by  lower  rates  from 
the  eastern  seaboard  to  the  Pacific  Coast  than  from 
Chicago?  Clearly  not  the  carriers'  interests.  Any 
such  adjustment  of  rates  would  be  altogether  ad- 
verse to  the  interests  of  the  carriers  and  would 
almost  inevitably  result  in  their  hauling  much  freight 


308 


VALUATION  AND  RATES 


APQco 


rjT  o"  rH~  to  to"  in" 

rH  C<I 


101010000101010 


'          .  »  -    T^          -  -     VW          -    *— *          -    UV     IW     *— *          '  •*-/     ^ 


,   O>   r-   r-l 

O.'       - 


§  ! 


•  o    •    •  o    •  ua    •  o  10  to 

»s 

o 

.    .  o    •  o     •       10 

2 

•            •      •  rH      •  rH      •         rH 

)OlOOOlOOlOlOOlOlOOO 
»U3t-O-*l«COOlOOO<OC-lO<O1*' 

c 
tf 

iH 

o  o 

10      , 

$s 

t-l     1           rH                   II 

10                           O         O 

CO                                CO          •«< 

s 

0000 
0  00  00  0 

•  o  to  to  to  o 

•  N  OO  t-  OO  O 

o 

0 

Ml 

t- 

•   ^LO           10^ 

*o    '     '    * 

OOIOOIOIOOIOIOOOIOOIOOIOIOIOOOOIO 
«O«Dt-OU3lOOUSOO«OOSU3OlO«O«Ot-t-"3«OtO«O 

,0  ^  ^  to  »Ao  o 

10  •«  10  10  U3 


o  o  o  10  d 

0  «M   C<!   00  0> 


o  o  o  o  o 
O  o  era 


®  ,2  ;  ;  "3 


:^^5|gS 


o>  -a 


|S|||3a 

Illglil 

«  ^  fl  2    .*  ^ 


5  |IlflH||iJl*IiJlt!« 

omSHSHMKWASoigSo^E^liig 


? 


RATES  309 

from  the  seaboard  to  the  Pacific  Coast  which  they 
now  haul  from  intermediate  points  such  as  Chicago, 
a  shorter  distance,  at  a  less  expense. 

"The  same  policy  would  result  also  in  serious  in- 
jury to  many  of  the  industries  located  at  interior 
points  which  have,  under  equal  rates,  built  up  a 
large  and  profitable  business  on  the  Pacific  Coast. 
Many  articles  are  produced  and  manufactured  both 
in  the  interior  and  on  the  Atlantic  seaboard. 

"Only  a  certain  quantity  of  these  manufactured 
articles  can  at  present  be  consumed  on  the  Pacific 
Coast.  Any  rate  adjustment  that  tends  to  stimulate 
the  movement  of  these  articles  from  the  Atlantic 
seaboard  will  to  the  same  extent  decrease  the  move- 
ment from  Chicago  and  other  intermediate  points. 

"It  is  clear  that  the  carriers'  interest,  and  the  inter- 
ests of  the  major  part  of  the  public  served,  lie  in  the 
direction  of  the  maintenance  of  rates  from  the  inter- 
mediate points  no  higher  than  from  the  Atlantic 
coast.  The  intent  of  the  fourth  section  and  the  aim 
of  the  Commission  in  enforcing  its  provisions  is  to 
reduce  discriminations,  not  to  augment  them.  Dis- 
criminations of  vast  importance  against  intermediate 
points  of  origin  would  be  created  by  the  establish- 
ment of  lower  rates  from  the  Atlantic  seaboard  to 
the  Pacific  coast  than  from  intermediate  points." 

j 

Grouping  of  Origin  Territory  Different  for  Competi- 
tive and  Non-Competitive  Destination  Territory 

"Fourth  Section  Order  No.  124  recognized  the  ex- 
istence of  a  wide  blanket  of  rates,  as  to  points  of 
origin,  extending  from  the  Missouri  River  to  the  At- 
lantic Ocean  on  traffic  to  the  Pacific  Coast,  while  it 
did  not  provide  for  such  blanketing  of  rates  to  points 
in  the  intermediate  territory.  The  order  has  the 
effect  of  bringing  about  lower  rates  to  this  territory 
from  the  Missouri  River  and  Chicago  than  from  Pitts- 


310  VALUATION  AND  RATES 

burgh  and  the  Atlantic  seaboard.  ***** 
"New  York  can  not  justly  claim,  that  because  Chi- 
cago is  given  the  same  rate  as  New  York  to  the  Pa- 
cific Coast,  New  York  should  be  given  the  same  rate 
as  Chicago  to  the  intermediate  points.  The  claim 
that  New  York  should  be  permitted  to  land  freight 
at  Salt  Lake  City,  Reno  or  Phoenix  at  the  same  rate 
as  Chicago  is  no  more  justified  than  the  claim  that 
New  York  should  be  permitted  to  land  freight  at 
Omaha,  Kansas  City,  or  Minneapolis  at  the  same 
rate  as  Chicago." 

"Upon  the  whole  record,  we  are  of  the  opinion 
that  these  carriers  are  justified  in  the  maintenance 
of  a  blanket  as  to  points  of  origin  on  rates  to  the 
Pacific  Coast,  and  that  this  practice  carries  with  it 
no  necessity  or  obligation  of  blanketing  the  same 
territory  of  origin  in  establishing  rates  to  interme- 
diate points." 

"This  intermountain  territory  should  be  distin- 
guished from  that  territory  lying  along  the  Pacific 
Coast,  approximately  200  miles  in  width,  to  which 
rates  from  the  east  have  been  or  may  be  arrived  at 
by  adding  to  the  terminal  rates  either  local  rates  or 
arbitraries  proportional  thereto  from  the  terminals 
to  the  destinations." 

Low  Railroad  Rates  on  Competitive  Traffic  Justified 

(4)  "As  we  view  it,  the  Panama  Canal  is  to  be 
one  of  the  agencies  of  transportation  between  the 
east  and  the  west,  but  not  necessarily  the  sole  carrier 

of  the  coast-to-coast  business.  If  the  railroads  are 
able  to  make  such  rates  from  the  Atlantic  seaboard 
to  the  Pacific  Coast  as  will  hold  to  their  lines  some 
portion  of  this  traffic  with  profit  to  themselves,  they 
should  be  permitted  so  to  do. 

"The  acceptance  of  this  traffic  will  add  something 
to  their  net  revenues,  and  to  that  extent  decrease, 


RATES  311 

and  not  increase,  the  burden  that  must  be  borne  by 
other  traffic.  It  will  also  give  the  shippers  at  the 
coast  points  the  benefits  of  an  additional  and  com- 
petitive service." 

"We  are  of  the  opinion  that  these  carriers  should 
be  permitted  to  compete  for  this  long-distance  traffic 
so  long  as  it  may  be  secured  at  rates  which  clearly 
cover  the  out-of-pocket  cost." 

Low  Terminal  Rates  Not  Unjust  to  Intermediate 
Points 

(5)  "The  fact  that  rates  to  the  terminals  are  un- 
usually low  does  not  justify  the  maintenance  of  rates 
to  intermediate  points  that  are  unreasonably  high, 
but  a  lower  rate  to  the  terminal  being  fixed  of  neces- 
sity, rates  to  intermediate  points,  which  are  higher, 
do  not  necessarily  unjustly  discriminate  against  these 
points."     ***** 

(6)  "Were  the  carriers  required  to  observe  the 
percentages  named  in  the  original  order  *  *  *  they 
would  be  confronted  with  the  alternative  of  either 
reducing  the  rates  to  intermediate  points  to  a  level 
that  would  result  in  great  reductions  in  revenue,  or 
continuing  rates  to  the  Pacific  Coast  ports  which  are 
not  low  enough  to  allow  the  traffic  to  move  by  the 
all-rail  lines.     In  that  event  their  choice  would  be 
governed  by  the  relative  attractiveness  of  the  re- 
spective tonnages  involved. 

"The  very  great  reductions  in  their  revenue  to 
intermediate  points,  brought  about  by  an  attempt 
on  their  part  to  meet  the  water  competitive  rates  at 
the  terminals,  would  in  many  instances  cause  their 
retirement  from  the  terminal  traffic  and  its  total 
abandonment  to  the  water  carriers.  Such  a  course 
of  action  would  not  benefit  the  intermediate  points 
of  destination  in  the  least  and  would  result  in  serious 
injury  to  many  intermediate  points  of  origin." 


312  VALUATION  AND  RATES 

Competition    Is    Beneficial — Not    to    Be 
Diminished 

"The  relief  afforded  from  the  fourth  section  should 
be  sufficient  in  each  instance  to  permit  the  carriers 
to  continue  to  compete  for  the  terminal  traffic  so 
long  as  it  may  be  secured  at  rates  that  are  sufficient 
to  yield  a  revenue  in  excess  of  operating  cost. 

"The  maximum  of  public  benefit  from  the  fourth 
section  will  result  from  the  enforcement  of  condi- 
tions that  will  tend  to  preserve  and  promote,  and 
not  to  diminish  or  retard  competition. 

"Looking  at  the  country  as  a  whole,  but  more  es- 
pecially at  the  great  producing  and  consuming  areas 
in  the  interior,  it  is  believed  that  what  is  herein 
proposed  will  best  accomplish  that  end  under  pre- 
vailing conditions." 

Principles   Involved   in  Transcontinental  Rates 

The  following  principles  relating  to  rates  may 
be  stated  as  the  basis  of  the  opinion  of  the  Com- 
mission in  this  case  : 

(a)  Competition  must  be  reasonably  possible, 
not  merely  theoretical,  to  justify  the  relief  from  the 
fourth  section. 

That  the  extent  of  the  relief  to  be  granted  must 
be  determined  on  the  basis  of  possibility  of  actual 
competition — being  greater  at  points  where  com- 
petition is  most  acute  and  less  as  circumstances  tend 
to  equalize  the  conditions  of  competition.  (Quota- 
tion 1) 

(b)  Commerce  and  industries  heretofore  built 
upon  existing  rates  are  entitled  to  consideration  in 
determining  the  fair  adjustment  between  rates  ap- 
plying   from    competitive    points    of    production. 
Rates  should  be  at  least  no  higher  on  comeptitive 
traffic  from  interior  points  of  production,  on  which 
shorter  hauls  to  points  of  destination  are  involved, 


BATES  313 

than  rates  from  more  distant  coast  points  of  pro- 
duction. 

The  grouping  of  points  of  origin  on  traffic  des- 
tined to  competitive  territory  carries  with  it  no  ob- 
ligation to  maintain  the  same  grouping  of  traffic 
destined  to  intermediate  non-competitive  territory. 
(Quotation  3) 

(c)  Railroads  should  be  allowed  to  reduce  their 
rates  to  such  an  extent  as  will  enable  them  to  com- 
pete with  other  systems  of  transportation,  if  such 
rates  exceed  the  out-of-pocket  expense  incurred  in 
performing  the  service.    Such  a  policy  tends  to  de- 
crease rates  on  other  traffic,  and  secures  to  some 
points  additional  and  competitive  service.     (Quota- 
tion 4) 

(d)  Low  rates  to  competitive  terminal  points  do 
not  justify  unreasonably  high  rates  to  intermediate 
points,  but  a  low  rate  to  a  terminal,  fixed  by  the 
necessities  of  competition, -does  not  necessarily  dis- 
criminate against  the  intermediate  non-competitive 
point.    (Quotation  5) 

(e)  To    reduce    rates    to    intermediate    points 
of  destination  to  the  same  basis  as  terminal  points 
would  in  many  instances  cause  the  retirement  of 
railroads  from  competitive  terminal  traffic.     Such 
action  would  not  benefit  the  intermediate  points  of 
destination  and  would  result  in  injury  to  many  in- 
termediate points  of  origin.     The  maximum  public 
benefit  results  from  increased  and  not  from  dimin- 
ished or  retarded  competition.     (Quotation  6) 

(f)  In  some  instances  discriminations  are  una- 
voidable.    They  are  not  necessarily  unjust. 

Principles   Applicable   Generally 

The  principles  here  stated  apply  not  only  to  these 
Transcontinental  rates — which  are  most  important 
— but  to  all  rate  situations  in  which  transportation 


314  VALUATION  AND  RATES 

charges  must  be  made  less  for  performing  the 
same  service  in  some  instances  than  in  others.  They 
apply  in  the  case  of  traffic  carried  by  circuitous 
routes  and  that  moved  in  competition  with  other 
systems  of  transportation — in  all  of  the  so-called 
"long  and  short  haul"  rates. 

Relation    of    Valuation    to    Rates 

Many  prominent  railroad  officials  have  stated  at 
various  hearings  as  to  the  fairness  of  existing  or 
proposed  rates,  that  rates  bear  no  relation  to  the 
value  or  the  capitalization  of  the  property  used  for 
transportation  purposes.  Many  prominent  men  in 
public  life,  writers  of  books  and  magazine  articles, 
editors  and  others,  have  stoutly  maintained  that  all 
rates  should  be  based  on  a  fair  return  on  the  actual 
physical  value  of  the  property  used  in  performing 
the  transportation  for  which  the  charge  is  made, 
plus  the  cost  of  performing  the  service. 

What  is  the  true  relation  between  the  value  or 
capital  of  a  railroad  and  its  rates;  between  cost  of 
service  and  rates? 

The  rate  schedule,  as  a  whole,  should  be  such 
that  the  total  income  shall  not  be  less  than  the  cost 
of  operating  and  maintaining  the  property  and  give 
in  addition  a  fair  return  on  the  value  of  the  property 
employed. 

The  valuation  will  not  definitely  fix  the  proper 
general  level  of  rates.  It  will  merely  establish 
a  line,  below  which  the  general  level  of  the  rates 
may  not  go — an  irreducible  level,  below  which  rates 
would  be  confiscatory. 

The  rate  of  return  on  value  will  be  greater  for 
some  roads  than  for  others.  It  is  not  humanly  pos- 
sible to  adjust  rates  in  such  a  way  that  each  road 
in  the  country  shall  earn  exactly  the  same  return 
on  its  valuation  as  every  other  road. 


BATES  315 

If  the  weakest  road  is  allowed  a  fair  return  on 
its  value,  then  evidently  the  strongest  road  will 
earn  more  than  a  bare  living,  for  if  the  strongest 
road  is  allowed  to  earn  only  a  bare  living  the 
weakest  road  will  be  confiscated. 

This  alone  is  the  application  of  valuation  to  rates. 

As  to  the  adjustment  of  rates  in  detail  between 
commodities  or  localities,  the  valuation  is  not  ap- 
plicable, as  such  adjustment  must  always  be  based 
on  the  many  conditions  attending  any  particular  sit- 
uation— not  on  any  single  condition  or  circumstance 
alone — as  the  previous  discussion  in  this  chapter 
clearly  shows. 

Relation    of    Cost    of    Service    to    Rates 

The  relation  between  cost  of  service  and  rates 
is,  that  the  minimum  rates  shall  be  high  enough  in 
every  instance  to  pay  something  more  than  the 
out-of-pocket  expense  incurred  in  performing  the 
service  for  which  the  rate  is  charged.  Cost  of  serv- 
ice must  be  considered  in  making  every  rate. 

Cost  of  service,  as  applied  to  particular  rates — 
like  valuation  as  applied  to  the  rate  schedule  as  a 
whole — establishes  the  irreducible  minimum  below 
which  a  rate  must  not  be  made.  If  any  commodity 
is  carried  at  a  rate  which  does  not  cover  the  cost 
of  service,  all  other  commodities  transported  are 
made  to  pay  the  loss  thereby  incurred — a  burden 
not  justly  attaching  to  them. 

Aside  from  this  limiting  feature,  cost  of  service 
is  only  one  element  of  many  which  are  to  be  con- 
sidered in  determining  rates. 

Illustration — Chicago-New  York  Traffic 

Consideration  of  the  actual  conditions  which  sur- 
round transportation  will  make  this  clear.  As  an 
illustration,  let  us  consider  the  freight  traffic  be- 


316  VALUATION  AND  RATES 

tween  Chicago  and  New  York.  The  following  tab- 
ulation shows  some  of  the  characteristics  of  the 
principal  lines  which  move  this  traffic: 

Number  of  Traffic** 

Distance,      Main  Line  Density 

Railroad                                            Miles             Tracks  (System 

(generally)  average) 

Pennsylvania  R.  R I     908                   4  5.91 

Pennsylvania  Co J                              2  4.74 

Wabash 1     936  1  1.47 

D.  L.  &  W J  2  4.84 

New  York  Central I     978  4  3.36 

L.  S.  &  M.  S J  2  3.67 

Grand  Trunk  |     983  2  2.83 

Lehigh  Valley  J  2  3.81 

Erie    \     998  2  3.53 

Chicago  &  Erie J  2  3.93 

Baltimore  &  Ohio 1047  2  3.18 

**Traffic  units,  in  millions,  per  mile  of  line— ton-miles  plus 
passenger-miles. 

The  freight  rates  by  all  of  these  lines  between 
Chicago  and  New  York  are  the  same.  The  distance, 
value  and  density  of  traffic  and  operating  conditions 
of  these  several  railroads  vary  widely.  All  things 
considered,  it  is  probable  that  the  New  York  Cen- 
tral or  Pennsylvania  can  move  this  traffic  at  less 
cost  per  unit  than  any  of  the  other  lines,  and  that 
it  will  cost  the  Baltimore  &  Ohio  more  than  any 
other  of  the  lines  on  account  of  greater  distance. 

Suppose  we  attempt  to  base  the  rate  between 
Chicago  and  New  York  on  the  cost  of  service.  Shall 
we  use  the  New  York  Central  Line  or  the  Baltimore 
&  Ohio  line  as  a  basis?  If  we  use  the  former,  some 
of  the  other  roads  must  abandon  the  traffic  as  their 
costs  per  unit  would  be  much  higher  than  that  used 
in  determining  the  rate. 

The  physical  value  per  mile  of  line  of  the  New 
York  Central  or  Pennsylvania  is  the  maximum,  the 


RATES  317 

Wabash-D.  L.  &  W.  joint  line  the  minimum.  Which 
valuation  is  to  be  used? 

The  New  York  Central  in  part  is  six-track,  four- 
track,  three-track  and  double-track.  How  many  of 
the  six  tracks  may  be  properly  apportioned  to  the 
Chicago-New  York  traffic  in  arriving  at  the  value 
of  the  facilities  used  in  carrying  it? 

The  density  of  traffic  is  a  maximum  on  the  lines 
of  the  Pennsylvania  and  New  York  Central  between 
the  two  points;  it  is  the  minimum  on  the  Wabash 
and  the  Grand  Trunk.  As  the  cost  of  moving  any 
particular  traffic  varies  with  its  volume,  the  cost  of 
service  per  unit  will  be  higher  on  the  Wabash  and 
Grand  Trunk  than  on  the  Pennsylvania  and  New 
York  Central.  Which  is  to  be  used  as  a  basis  for 
determining  rates,  the  roads  of  maximum  or  mini- 
mum traffic  density? 

The  impossibility  of  using  valuation  and  cost  of 
service  in  determining  the  fairness  of  rates,  to  any 
greater  extent  than  that  hereinbefore  stated,  is  ap- 
parent whenever  an  attempt  is  made  to  apply  them 
to  competitive,  commercial  and  physical  conditions 
that  actually  exist. 

Same   Condition   Applies   to   All   Traffic 

This  is  true  not  only  as  to  those  railroads  con- 
necting large  centers  of  traffic,  but  applies  to  prac- 
tically all  railroad  business.  There  are  few  points 
in  this  country  which  produce  or  receive  consider- 
able traffic  that  are  not  served  by  more  than  one 
railroad. 

But  even  in  those  instances  where  traffic  origi- 
nates at  points  served  by  one  road  only,  the  com- 
modities they  produce  compete  with  like  commodi- 
ties produced  on  other  roads,  as  they  are  sold  in 
competition  in  common  markets,  so  that  commercial 
factors,  and  not  value  of  property  employed,  or  cost 


318  VALUATION  AND  RATES 

of  service,  must  usually  be  employed  in  determining 
the  rate,  as  in  the  case  of  direct  competition  between 
one  or  more  railroads. 

Conclusion 

Rates  are  the  resultant  of  many  factors;  cost  of 
service,  value  of  service,  relation  of  cost  of  service 
to  the  selling  price  of  the  commodity,  the  nature 
and  extent  of  risk  of  damage  and  loss  involved, 
competition  between  railroads,  between  railroads 
and  other  systems  of  transportation,  between  com- 
modities, between  localities,  and  many  other  cir- 
cumstances and  conditions. 

No  public  authority  in  this  country  has  ever  at- 
tempted to  prescribe  a  schedule  of  rates  based 
strictly  on  the  value  of  the  property  and  the  cost 
of  service.  Such  a  rate  schedule  would  wreck  the 
business  and  industrial  organization  of  the  whole 
country. 


RATE   REGULATION 
Limitation   of   Regulating   Authority 

Some  fundamental  facts  pertaining  to  rate  regu- 
lation have  evidently  not  been  given  proper  consider- 
ation by  some  writers  discussing  the  subject.  There 
is  no  question  that  regulation  of  the  rates  of  a  com- 
mon carrier  is  necessary  and  in  the  interest  of  both 
the  public  and  the  railroads.  On  the  other  hand, 
legislative  authority  to  prescribe  rates  may  not  be 
arbitrarily  exercised. 

It  is  also  to  be  remembered  that  a  railroad  com- 
pany has  the  title  and  ownership  of  its  property  to 
the  same  extent  that  any  other  property  owner  has 
and  does  not  hold  it  for  the  use  or  benefit  of  the 
public  in  the  relation  of  trustee  to  principal. 

The  Supreme  Court  of  the  United  States  has  held 
repeatedly  that,  while  public  authority  has  power 
to  regulate  the  use  of  railroad  property,  it  is  not 
the  owner,  nor  has  it  any  equity  in  it  and,  subject 
to  the  limitation  that  rates  shall  not  be  unjust  and 
discriminatory,  the  railroads  may  manage  their  busi- 
ness as  individuals  or  other  non-public  business  cor- 
porations. 

Return  to  Be  Based  on  Value  of  Railroad 
Property 

Railroad  investments,  like  other  investments,  are 
subject  to  risk.  There  is  no  assurance  of  profit  at 
the  inception  of  the  enterprise,  and  if  badly  con- 
ceived the  loss  is  incurred  by  the  investor.  It  is  no 
more  than  just,  then,  that  the  investor  should  be 
rewarded  in  the  measure  which  his  foresight  and 


320  VALUATION  AND  RATES 

business  judgment  justifies  and  in  proportion  to  the 
element  of  risk  he  assumes,  as  investors  in  other 
enterprises  are.  The  public  does  not  underwrite 
the  losses  of  a  railroad;  neither  can  it,  through  leg- 
islative authority,  take  away  the  just  rewards  of  a 
well-conceived  enterprise. 

In  the  Minnesota  Rate  Case,  Justice  Hughes,  of 
the  United  States  Supreme  Court,  said:* 

"It  is  clear  that  in  ascertaining  the  pres- 
ent value  we  are  not  limited  to  the  consid- 
eration of  the  amount  of  the  actual  invest- 
ment. If  this  has  been  reckless  or  improvi- 
dent, losses  may  be  sustained  which  the 
community  does  not  underwrite^  As  the 
company  may  not  be  protected  in  its  actual 
investment,  if  the  value  of  its  property  be 
plainly  less,  so  the  making  of  a  just  return 
for  the  use  of  the  property  involves  the  rec- 
ognition of  its  fair  value  if  it  be  more  than 
its  cost. 

"The  property  is  held  in  private  owner- 
ship and  it  is  that  property,  and  not  the 
original  cost  of  it,  of  which  the  owner  may 
not  be  deprived  without  due  process  of 
law." 

Earnings    May   Not    Be    Confiscated 

In  the  matter  of  prescribing  rates  by  public  au- 
thority, in  which  it  was  contended  that  the  pre- 
scription was  merely  regulation,  Justice  Brewer,  of 
the  United  States  Supreme  Court,  said: 

"The  equal  protection  of  the  laws — the 
spirit  of  common  justice — forbids  that  one 

*Blackface  type  in  the  text  shows  the  emphasis  of  the  author 
of  this  book.  This  is  to  be  remembered  in  reading:  quotations 
from  other  books  and  legal  opinions. 


RATE  REGULATION  321 

class  should  by  law  be  compelled  to  suffer 
loss  that  others  may  gain.  If  the  state 
were  to  seek  to  acquire  title  to  these  roads, 
under  its  power  of  eminent  domain,  is  there 
any  doubt  that  constitutional  provisions 
would  require  the  payment  to  the  corpora- 
tion of  just  compensation,  that  compensa- 
tion being  the  value  of  the  property  as  it 
stood  in  the  markets  of  the  world,  and  not 
as  prescribed  by  an  act  of  the  legislature? 
Is  it  any  less  a  departure  from  the  obliga- 
tions of  justice  to  seek  to  take  not  the 
title,  but  the  use  for  the  public  benefit  at 
less  than  its  market  value?" 

"Property  invested  in  railroads  is  as 
much  protected  from  public  appropriation 
as  any  other.  If  taken  for  public  uses, 
its  value  must  be  paid  for.  Constitutional 
guarantees,  to  this  extent,  are  explicit;  and 
in  such  condemnation  proceedings  no  in- 
quiry is  permitted  as  to  how  the  owners 
have  acquired  the  property,  provided  only 
it  be  legally  held  by  them.  *  *  *  * 

"These  propositions  in  respect  to  con- 
demnation proceedings  are  so  well  settled 
that  no  one  ever  questions  them.  The  same 
general  ideas  must  enter  into  and  control 
legislation  of  the  kind  before  us.  The 
value  of  the  property  cannot  be  destroyed 
by  legislation  depriving  the  owner  of  ad- 
equate compensation. 


"Now,  if  the  public  was  seeking  to  take 
title  to  the  railroad  by  condemnation,  the 
present  value  of  the  property,  and  not  the 
cost,  is  that  which  (it)  would  have  to  pay." 


322  VALUATION  AND  RATES 

These,  and  many  other  decisions  of  the  Supreme 
Court  of  the  United  States  make  it  very  clear  that 
the  earnings  of  a  railroad  are  not  subject  to  legis- 
lative control,  but  that  rate  regulation  is  limited  to 
preventing  unjust  and  discriminatory  rates.  If  fair 
and  undiscriminatory  rates  produce  large  net  earn- 
ings for  a  particular  railroad,  such  earnings  cannot 
be  legally  confiscated  by  legislative  authority  any 
more  than  the  property  itself. 

These  decisions  emphasize  also  that  the  railroads 
are  entitled  to  a  return  on  the  full  value  of  their 
property — not  on  its  cost — not  on  the  value  less  the 
value  of  land  grants  or  other  public  grants  of  aid 
or  money,  given  to  promote  otherwise  impossible  en- 
terprises. These  decisions  effectually  dispose  of 
the  many  fantastic  propositions  advanced  from  vari- 
ous sources,  which  would  have  railroad  property  set 
apart  and  considered  as  something  different  from 
other  property. 

Fair   Return   on   Value 

The  term,  fair  return  on  value  of  property  em- 
ployed, has  often  been  used  in  this  and  preceding 
chapters  of  this  book  and  in  all  court  decisions  and 
discussions  relating  to  railroad  rates.  It  is  a  matter 
having  a  most  important  bearing  on  the  subject  of 
rates,  and  a  statement  of  some  conditions  surround- 
ing investments  in  railroad  property,  and  their  re- 
lation to  a  fair  return  on  value  of  property  em- 
ployed, is  essential  to  an  understanding  of  the  sub- 
ject. 

Return  Can  Not  Be  Uniform 

As  indicated  in  the  illustration  of  the  different 
lines  moving  traffic  between  Chicago  and  New  York, 
in  the  chapter  on  rates,  it  is  not  possible  to  so  adjust 
rates  that  there  shall  be  a  uniform  return  to  all 
roads  alike  on  value  of  property  employed.  It  is 


RATE  REGULATION  323 

inevitable  that  some  roads  must  earn  a  larger  re- 
turn on  such  value  than  others.  In  consequence,  the 
fair  return  for  any  particular  railroad  must  be  de- 
termined by  consideration  of  the  conditions  sur- 
rounding it. 

Rate    of    Return    Based    on   Security    Afforded 
the    Investment 

In  all  lines  of  business,  the  rate  of  return  on 
money  invested  depends  on  the  margin  of  security 
afforded  it.  When  this  margin  is  wide,  the  re- 
turn is  small ;  when  there  is  an  element  of  risk,  the 
return  is  larger,  and  the  degree  of  risk  determines 
how  much  larger  the  return  must  be  as  compared 
with  investments  in  which  there  is  practically  no 
risk. 

Government  bonds  of  the  United  States  pay  2  ^5 
and  3  per  cent  interest;  City  of  Chicago  and  New 
York  bonds  pay  4  or  4^  per  cent  interest;  smaller 
municipalities  pay  5,  6  and  7  per  cent  interest.  All 
of  these  bonds  have  a  wide  margin  of  security,  as 
the  bonds  are  a  lien  on  physical  property  or  revenue. 

The  net  earnings  on  the  capital  and  surplus  of 
national  banks  for  several  years  has  averaged  be- 
tween 8%  and  10  per  cent;  many  industrial  corpo- 
rations average  from  7  to  10  per  cent,  and  the  more 
prosperous  ones  much  more. 

Large    Element    of    Risk    in    Railroad 
Investment 

As  compared  with  banking  or  the  business  of  the 
average  industrial  corporation,  the  business  of  the 
average  railroad  may  be  said  to  involve  much  more 
risk.  When  the  business  of  banks  and  industries 
begins  to  shrink,  railroads  are  the  first  to  feel  its 
effect.  The  ordinary  manufacturer  or  business  man 
may  curtail  his  expenses  in  much  greater  measure 
during  a  period  of  depression  than  a  railroad,  as 


324  VALUATION  AND  RATES 

all  of  its  large  fixed  charges  and  rentals  and  at 
least  34  per  cent  of  its  operating  expense  are  en- 
tirely independent  of  its  traffic  and  hence  of  its 
revenue. 

As  to  the  original  investors,  the  very  large  ele- 
ment of  risk  involved  on  account  of  contingencies  of 
construction  and  the  uncertainty  of  traffic  estimates 
has  been  heretofore  shown.**  It  would  seem  fair 
that  the  return  on  railroad  value  should  be  very 
much  larger  than  the  returns  in  other  lines  of 
business  in  which  the  element  of  risk  enters  to  a 
much  smaller  extent. 

Effect  of   Fair  Return  on  Development 

This  is  a  matter  which  will  have  a  very  large  in- 
fluence on  the  future  extensions  of  railroads  in  those 
portions  of  the  country  which  are  sparsely  settled 
and  whose  development  at  the  present  time  is  being 
retarded  through  lack  of  needed  transportation  fa- 
cilities. 

There  are  still  large  areas,  of  great  potential 
wealth,  in  the  West,  North-West  and  South- West, 
which  cannot  develop  materially  until  they  are  pro- 
vided with  transportation.  Construction  in  such  ter- 
ritories will  involve  a  repetition  practically  of  the 
experience  met  in  the  earlier  periods  of  railroad 
building  which  has  been  sketched  in  the  chapters 
on  Promotion  and  Construction. 

The  seven  to  ten  year  period  following  the  con- 
struction of  such  lines  will  in  most  cases  result  in 
net  losses  from  operation,  rather  than  profits,  with 
a  very  large  probability  of  defaulted  interest  on 
bonds.  The  recent  contracts  between  the  Canadian 
Government  and  the  Grand  Trunk  Railway  empha- 
size the  truth  of  this  statement. 

Only   in    exceptionally   favorable   situations   can 

**In  Chapter  on  Promotion. 


RATE  REGULATION  325 

investors  be  interested  in  such  enterprises  unless 
the  fairly  anticipated  ultimate  returns  shall  be  very 
much  larger  than  from  well  secured  conservative  in- 
vestments. Why  should  an  investor  take  the  risk 
involved  in  railroad  construction  and  operation  un- 
less the  return  is  large,  when  an  investment  in  a 
solid  banking  or  industrial  enterprise  promises  a 
practically  assured  and  equivalent  return? 

The  need  for  developing  railroads  is  not  confined 
to  the  far  western  territory.  Scattered  through  the 
Central  and  Southern  States,  in  smaller  areas,  are 
local  resources  such  as  mineral  and  timber  and  iso- 
lated agricultural  districts,  the  proper  development 
of  which  requires  the  building  of  only  a  few  miles 
of  branch  lines. 

Under  existing  conditions  the  chance  of  raising 
the  money  to  pay  for  the  construction  of  such  lines 
is  not  promising  enough  to  warrant  the  expense  of 
making  the  survey  necessary  to  gather  the  data  for 
presentation  to  investors.  Such  construction  has 
generally  been  abandoned,  practically  none  of  it 
having  been  done  since  1907. 

In  the  interest  of  the  country  as  a  whole  the  de- 
velopment of  such  resources  should  be  undertaken. 
Development  of  those  here  mentioned  cannot  pro- 
ceed under  existing  conditions.  The  necessity  for 
making  investment  in  railroads  attractive,  in  order 
to  stimulate  their  construction,  is  just  as  essential 
now  as  it  was  in  the  earlier  period  of  larger  devel- 
opment. 

Rate  regulation,  directed  toward  the  curtailment 
of  what  by  some  classes  has  been  termed  the  ex- 
cessive profits  of  the  most  prosperous  railroad  sys- 
tems, has  resulted  in  a  condition  making  it  impos- 
sible to  construct  less  promising  enterprises  which 
are  necessary  to  normal  development  and  growth  in 
some  wide  territories  and  many  localities. 


326  VALUATION  AND  RATES 

Fair    Return    on    the    Atchison,  Topeka 
&    Santa    Fe 

In  his  testimony  before  the  Interstate  Commerce 
Commission,  at  a  hearing  on  the  proposed  increase 
of  rates  in  Western  Territory,  Mr.  E.  P.  Ripley, 
President  of  the  Atchison,  Topeka  &  Santa  Fe,  tes- 
tified on  the  subject  of  fair  return  as  follows: 

Question:  "Do  you  want  to  make  a  statement 
as  to  what  you  think  the  Santa  Fe  should  earn  in 
order  to  have  money  to  pay  adequately  its  stock- 
holders, to  make  the  improvements  necessary,  to 
borrow  money,  to  have  the  credit  to  borrow  at  low 
rates,  and  to  serve  the  public  to  the  fullest  proper 
capacity?" 

Mr.  Ripley:  "That,  of  course,  is  a  matter  of 
judgment.  That  would  vary  with  different  roads. 
So  far  as  the  Santa  Fe  is  concerned,  I  think  we 
ought  to  earn  double  what  we  pay  in  dividends  at 
least.  For  instance,  if  we  pay  6%  in  dividends,  I 
think  we  ought  to  earn  12%  on  our  stock,  if  not 
more;  certainly  not  less  than  that." 

Return   to    Provide   for   Unproductive 
Improvements 

There  is  one  class  of  railroad  improvement  and 
betterment  which  should  be  provided  for  under  this 
"fair  return  on  value"  as  applied  to  rate  regulation. 
Passenger  stations,  track  elevations  in  cities,  the 
elimination  of  grade  crossings  where  the  safety  of 
the  public  and  operation  demand  it,  electrification  in 
densely  populated  areas  when  the  public  comfort 
and  health  require  it,  and  other  like  improvements 
which  do  not  in  themselves  add  to  net  earnings  but 
increase  capital  charges,  should  be  considered  in 
determining  the  fair  return.  Such  improvements 
should,  at  least  in  part,  be  paid  for  by  the  present 


RATE  REGULATION  327 

generation,  through  current  rates,  and  not  be  taken 
into  the  capital  account  to  stand  forever  as  a  fixed 
charge  against  transportation. 

Experience  has  shown  that  many  such  improve- 
ments, particularly  depots,  which  were  considered 
permanent  improvements  when  constructed,  have, 
through  increased  traffic  and  other  causes,  become 
inadequate  and  require  the  destruction  of  the  old 
and  construction  of  new  facilities.  Public  authority 
and  public  sentiment  have  ample  power  to  compel 
such  improvements,  and  the  rate-regulating  au- 
thority should  certainly  recognize  the  necessity  of 
providing  for  them  without  taxing  the  future  unduly. 

Not  Possible  to  Earn   Fair  Return   in  Some 
Instances 

There  are  certain  railroad  properties,  however, 
which  cannot  expect,  on  account  of  commercial 
conditions,  to  earn  a  fair  return  on  the  value  of 
their  property.  Many  of  our  present  terminal  and 
belt  railroads  were  constructed  when  the  now  large 
cities  were  much  smaller  and  land  values  were  only 
a  small  percentage  of  present  values.  Industrial 
development  has  enormously  enhanced  the  value  of 
real  estate  used  by  the  railroads  serving  these  larger 
cities. 

If  rates  were  fixed  on  the  basis  of  producing  a 
fair  return  on  the  value  of  property  used,  they  would 
be  so  high  as  to  decrease  largely,  and,  as  to  many 
industries,  actually  stop  the  flow  of  traffic.  Com- 
petition between  industries  would  force  some  of 
them  out  of  localities  where  high-priced  facilities 
required  excessive  terminal  charges  into  other  lo- 
calities. 

Some  recent  valuations  of  properties  of  this  class 
of  railroads  show  that  this  condition  is  an  actual 
one  and  not  theoretical;  in  fact,  it  is  encountered 


328  VALUATION  AND  RATES 

in  the  valuation  of  all  terminal  properties  at  impor- 
tant traffic  centers. 

Cost  of   Terminals   to   Be   Spread   Over 
System 

Where  such  costly  terminal,  belt  and  switching 
facilities  belong  directly  to  a  large  system,  their  cost 
may  properly  be  spread  over  the  whole  system,  as 
they  serve  the  system  as  a  whole  to  a  large  extent. 
The  terminal  charges  may  then  be  adjusted  so  that 
they  will  not  be  prohibitive.  As  to  independently 
owned  terminal  and  belt  line  railroads,  whose  cost 
cannot  be  spread  over  a  large  system  mileage,  the 
return  on  value  of  property  used  cannot  be  realized, 
as  the  rates  necessary  to  produce  it  would  be  pro- 
hibitive commercially. 

Decreased   Market  Price  of   Railroad  Securities 

The  following  statement  shows  the  dividend  pay^ 
ment  and  the  quotation  for  the  stock  of  several  of 
the  highest  class  railroad  properties  for  a  period  of 
six  years. 

It  will  be  noted  that  the  roads  shown  have  a  com- 
paratively high,  uniform  and  well-sustained  divi- 
dend record.  The  stock  quotations  for  the  whole 
list  show  an  average  decrease  in  selling  price  of 
about  25%  in  six  years.  That  is,  although  paying 
generally  the  same  rate  of  interest  now  as  six  years 
ago,  these  securities  are  only  worth  75%  as  much 
now  as  then.  They  are  the  issues  of  the  best  man- 
aged of  railroad  properties,  with  long-sustained  divi- 
dend records. 

Either  the  buying  power  of  money  has  been  en- 
hanced or  this  class  of  securities  is  looked  upon 
with  less  favor  now  than  formerly — that  is,  the  re- 
turn on  railroad  investment  is  not  as  well  assured 
now  as  formerly.  *  The  following  conditions  will  serve 

*Or   other  investments  yield   larger  returns. 


RATE  REGULATION 


329 


I     « 

O       t-       CO 

CO       (M        CO       00 

co     eg 

rt 

c- 

OS 

o 

OS 
rH 

Jj?      0-1 

eg     oo     cvi 

••M        OS        CO 

co     eg     t-     e<J 

O       rH 

CO       IO 

OS 

co 

OS 

rH 

W    ' 

0      «* 

St-       M< 
00       (M 

10     eg     \s>     os 
eg     co     o     oo 

eg     eg 

TH     eg 

CO 
0 

C<l 

to 

TH 

rH 

iU 

os     c<i      tr- 

rH       00       ^ 

eg     o     oo     os 

•*     co     eg     o 

CO       OO 

•«*«     eo 

00 

eo 

10 

o 

* 

* 

M    " 

fe       0 

Q         0 

co     oo      cq 

OS       CO       CO 

rH       CO       O       O 
10       CO       0       O 

iH       00 
rH       rH 

S 

10 

10 

< 

4! 
0 

IS 

§        T- 

O        TH        t~- 

t~       rH       CO       rH 
OO       CO       rH       rH 

00       O 
00       00 

co 
pq 

os 

I 

1 

1 

W          ^ 

t*      CO 

O     o 

rH       Tt*       rH 
O       CO       <?q 

CO       00       CO       00 
LO       CO       O       O 

10       0 

TH     eg 

0 

TH 

to 

& 

1 

•S    <. 

C<,       LO       rH 

co     o     eg     os 

eg     to 

CO 

t- 

*0 

CO 

ffi  ^ 
1  s 

TH       CO       00 
rH       rH 

TH       CP       0       00 

•«*<     eg     os     os 

TH         TH 

eg     co 

0       0 
rH       rH 

CO 

00 

oo 

CO 

TH 

| 

2 

fH 

O 

*3 

rH 

bfi     co 

£     ° 

CO       00       OS 

o     eo     eg 

oo     eg     o     -^ 

CO       ^f        rH        TH 

CO       i* 

eg     eg 

o 

rH 

CO 

CO 

A 

o 

i 

« 

I* 

tr-      <M      CO 

TH       rH 

oo     to     t—     t- 

rH       &t       t—       OS 

rH       TH 

t-     eg 

OS       O 

TH 

rH 
00 

TH 

rH 

I 

o 

•8 

OS 

bO     O 

JH      ° 

00       t-       Ui 

OS       CO       rH 

co     eg     t—     co 

LO       xf       OS       0 

oo     to 

rH       TH 

05 
OS 

•»*< 
CO 

L 

M 

3 

ffi 

o 

D 

CO 

j       OS 

r£ 

ro                  i-t^ 

°3 

i 

3     ? 

IO 

CO       t-       t- 

CO         \O         10         TjH 

t*      CO 

co 

O 

i 

s 

fi 

c. 

;>       0 

SS* 

•£ 

<d 

s 

1    :' 

CO 

co     t-     t- 

rH 

8 

M 

P 

H       rH 

r^       r^ 

c 

co 

CO          •       t" 

o     t-     10     to 

t-       CO 

CO 

O 

§ 

§ 

r 
<• 

3 

-|          03 

CO       t-       C- 

O       t-       10       CO 

t-    «o 

CO 

O 

M 

nD 

c 

h          " 

rH 

rH 

^j 

t-coot-tocot-cocoo 


1= 


COCOt-lOOt-lOCO 


o 


1 


-2    ,2 


I! 

O    P 


Pa 


o 

«C 

-  I 


s?  * 

I  § 

*  s 
o 


iei 


»! 

^     o 
J    J 


r    bH    ^J 


!Ufi 

^  1 « 1 1 1 

I  I  I  S  2  S 


J     ** 

I  s 

S      00 

M 
§1 


330  VALUATION  AND  RATES 

to  show  the  basis  on  which  this  judgment  of  the 
value  of  railroad  securities  rests. 

Increased   Operating   Expenses 

For  many  years  there  has  been  a  steady  increase 
in  railroad  operating  expense.  The  table  showing 
the  rate  of  compensation  paid  railroad  employees  in 
various  periods  explains  in  large  part  the  increased 
cost  of  operation.  The  materials  used  by  the  rail- 
roads to  the  greatest  extent,  such  as  steel,  coal,  lum- 
ber, and  ties,  show  at  least  no  tendency  toward  a 
lower  level  of  prices.  Heavier  engines  and  cars  de- 
mand larger  rail  sections,  and  hence  more  tonnage 
per  mile  and  a  higher  grade  of  material  (Open- 
hearth  steel  at  $2  per  ton  above  Bessemer),  and 
they  therefore  add  something  more  to  the  increase. 

Railway    Employees 
Classification    and    Wages 

Class  of  Increase  in  , Average  Daily  Wage \ 

Employees.  10  yrs.     1914       1913.       1912.       1911.       1904. 


General    officers  38# 

$16.06 

$15.67 

$14.62 

$14.82 

$11.61 

Other   officers  7# 

6.48 

6.44 

6.42 

6.36 

6.07 

General  office  clerks  14# 

2.54 

2.51 

2.50 

2.49 

2.22 

Station  agents  20# 

2.33 

2.28 

2.22 

2.19 

1.93 

Other  station  men  18# 

1.98 

1.96 

1.89 

1.89 

1.69 

Enginemen    28# 

5.24 

5.20 

5.02 

4.81 

4.10 

Firemen  37# 

3.22 

3.13 

3.03 

2.95 

2.35 

Conductors    28# 

4.47 

4.39 

4.30 

4.18 

3.50 

Other  trainmen  36£ 

3.09 

3.04 

2.97 

2.89 

2.27 

Machinists    25# 

3.27 

3.26 

3.21 

3.14 

2.61 

Carpenters    17# 

2.66 

2.63 

2.86 

2.54 

2.26 

Other  shopmen  24# 

2.36 

2.31 

2.24 

2.24 

1.91 

Section  foremen  24# 

2.20 

2.14 

2.09 

2.07 

1.78 

Other    trackmen  19# 

1.59 

1.58 

1.50 

1.50 

1.33 

Switch    tenders,    crossing 

tenders,     and      watch- 

men      None 

1.71 

1.70 

1.70 

1.74 

1.77 

Telegraph    operators   and 

dispatchers    20# 

2.56 

2.52 

2.47 

2.44 

2.15 

Employees  —  Floating 

equipment   8# 

2.35 

2.37 

2.37 

2.34 

2.17 

All   other  employees  and 

laborers   20£ 

2.20 

2.15 

2.10 

2.08 

1.82 

RATE  REGULATION  331 

This  table  shows  a  yearly  increase  in  the  average  daily  com- 
pensation of  all  classes  of  employees  except  switch  tenders.  The 
increases  in  the  ten-year  period  are  shown  by  percentages  of  the 
1904  wages. 

During  the  period  between  1908  and  1915  there 
has  been  an  increase  in  revenue  per  mile  of  railroad 
but  such  increase  has  not  been  in  proportion  to  the 
increased  operating  expense,  as  the  following  table 
shows : 


** 
Years. 

1907-8    .  .  . 

Ratio    of    Exp< 

Operating 
Revenue  per 
Mile  of  Line. 

.$10,613 

snse    to    Revenue 

Operating                    Ratio  of 
Expense  per                 Expense 
Mile  of  Line.            to  Revenue. 

$7,394                69.67% 
6,933                66.12 
7,712                66.24 
7,954                68.63 
8,066                69.28 
8,842                69.40 
8,834                72.22 
8,207                70.50 

1908-9    .  .  . 

.  .    10,486 

1909-10.  .  . 

.  .    11,650 

1910-11    .  . 

.  .    11,588 

1911-12.  .  . 

.  .    11,646 

1912-13.  .  . 

.  .    12,746 

1913-14   . 

.      12,232 

1914-15. 

11,623 

**Bureau  of  Railway  News  and  Statistics  Leaflet,  No.  32. 

Decrease   of   Return   on   Invested   Capital 

The  following  statement  shows  the  relation  of  Net 
Earnings  to  Capital  employed.  The  effect  of  the  in- 
creased ratio  of  operating  expense  to  revenue  is 
shown  by  the  decreased  return  on  capital  invested 
— this  latter  being  the  real  gauge  of  the  financial 
condition  of  the  railroads : 


332  VALUATION  AND  RATES 


-Ratio    of    Net    Earnings    to    Capital 


Years            c 
1906-7     .     . 

Net  Operating 
Income  per  Mile 
»f  Line  Operated 

$3,547 

Capital  per 
Mile 
Owned 

$58  298 

Percentage  of 
Net  Earnings 
to  Capital 

5  74% 

1907-8   .  .  . 

.  .    2,877 

57,201 

5.03 

1908-9    .  .  . 

.  .    3,188 

59,259 

5.38 

1909-10.  .  . 

.  .    3,508 

62,657 

5.59 

1910-11.  .  . 

.  .    3,143 

63,944 

4  93 

1911-12.  .  . 

.  .    3,044 

63,535 

4.79 

1912-13.  .  . 

3,384 

65,851 

5.15 

1913-14.  .  . 

.  .    2,829 

*65,500 

4.32 

1914-15. 

2,874 

*65,850 

4.36 

**Bureau  of  Railway  News  and  Satistics,  Leaflet  No.  32. 
*  Official  figures  not  yet  available. 

This  table  shows  that  the  earnings  of  capital  in- 
vested in  the  year  1914-15  were  only  76%  of  the 
earnings  on  capital  in  the  year  1906-7.  This  com- 
parison is  between  a  year  below  normal  and  one 
above,  but  the  table  shows  the  bad  financial  condi- 
tion generally,  for  a  period  extending  over  eight 
years. 

Margin  Between  Profit  and  Loss  Too  Narrow 

There  is  no  question  that  the  margin  between 
profit  and  loss  is  much  too  narrow  to  allow  the  rail- 
roads to  develop  along  normal  lines,  or  to  make 
their  securities  attractive  to  a  discriminating  in- 
vestor. 

A  very  considerable  percentage  of  the  entire  rail- 
road mileage  of  the  country  is  being  administered  by 
receivers.  While  some  of  the  railroad  trouble  has 
been  caused  by  mismanagement,  that  reason  alone 
will  not  account  for  the  impoverished  condition  of 
railroads,  which,  as  indicated  by  these  tables,  is 


RATE  REGULATION  333 

general.  It  applies  to  long-established,  well-man- 
aged properties  which  are  still  out  of  court.  Im- 
proving business  will  improve  the  present  condition 
somewhat,  but  the  trouble  is  fundamental — too  nar- 
row a  margin  of  profit  for  a  safe  business  propo- 
sition. 

The  net  earnings  of  railroads  must  be  increased 
if  they  are  to  be  maintained  in  a  safe,  healthful 
business  condition,  capable  of  producing  econom- 
ically the  service  which  the  business  of  the  country 
demands  and  of  expanding  as  its  business  grows. 

Three   Possible  Ways   of  Increasing   Net 
Earnings 

There  are  three  ways  of  increasing  net  earnings: 

(1)  Increasing  income  by  increasing  rates. 

(2)  Decreasing  operating  expense. 

(3)  Decreasing  fixed  charges. 

Increasing   Rates 

As  a  general  proposition,  increasing  rates,  as  to  a 
large  part  of  the  low  class  traffic,  will  tend  to  de- 
crease traffic  density  and  hence  the  unit  cost  of  mov- 
ing the  traffic.  The  discussion  in  the  chapter  on  rates 
shows  that  the  enormous  railroad  traffic  of  the  coun- 
try has  been  developed  by  the  application  of  very 
low  freight  rates. 

Increased    Rates    on    Particular    Classes    of   Traffic 
and  Certain  Commodities 

For  this  reason  radical  horizontal  increases  of 
rates  are  to  be  avoided  if  the  necessary  increase  in 
revenue  can  he  obtained  in  a  less  obectionable  way. 

Increases  of  rates  on  particular  classes  of  traffic  and 
certain  commodities  which  move  in  large  volume 
are  justified  on  several  grounds.  The  following  are 


334  VALUATION  AND  RATES 

examples  of  commodities  and  traffic  to  which  this 
statement  refers. 

The  rates  on  grain,  carload  lots,  are  probably 
below  the  actual  cost  of  service  in  some  instances. 
The  average  receipts  in  the  Eastern  District  for  1914 
were  4.03  mills  per  ton-mile  with  an  average  haul 
of  350  miles.  The  actual  revenue  on  export  grain 
hauled  over  the  New  York  Central  from  Chicago 
to  New  York  is  2.8  mills  per  ton-mile,  which  in- 
cludes the  cost  of  handling  at  both  terminals.  The 
cost  for  hauling  between  terminals  is  very  low  in- 
deed. 

The  average  rate  on  bituminous  coal,  carloads, 
for  the  same  district,  is  4.15  mills  per  ton-mile  with 
an  average  haul  of  129  miles.  Some  of  the  coal 
rates  must  certainly  be  unremunerative  if  this  is  the 
average  rate  on  so  short  a  haul. 

The  rates  for  transportation  over  branch  lines  and 
main  lines  of  secondary  importance  are  on  the  same 
general  level  in  some  instances  as  the  rates  applying 
on  main  lines  of  dense  traffic,  although  the  unit 
cost  of  transportation  is  certainly  higher. 

On  a  proper  analysis  of  cost,  rates  on  such  com- 
modities and  on  such  traffic  as  the  branch  line  traffic 
can  probably  be  shown  to  be  below  the  cost  of  serv- 
ice in  some  instances  and  disproportionately  low  on 
all  of  them  when  value  of  commodity  and  cost  of 
service — one  or  both — are  considered. 

The  rates  on  live  stock  and  packing-house  prod- 
ucts, considering  the  class  of  transportation  service 
required  must  be  very  near  or  below  cost  and  are 
certainly  disproportionately  low  when  compared 
with  the  rates  on  other  commodities  of  less  value. 
If  the  relative  cost  of  transportation  of  these  com- 
modities could  be  shown  in  comparison  with  that 
of  other  classes,  increases  in  rates  could  probably  be 
justified.  The  rates  on  such  commodities  should  not 


RATE  REGULATION  335 

be  based  solely  on  class  or  cost  of  service,  but  the 
value  of  the  service  also  should  have  consideration. 
If  the  investigation  of  cost  of  service  recom- 
mended in  the  article  on  Importance  of  Cost  Data 
in  the  chapter  on  rates  is  made  in  a  thorough  and 
exhaustive  manner,  an  increase  in  the  rates  on  such 
commodities,  which  move  in  large  volume,  could  be 
justified  before  the  Commissions  or  the  Courts  and 
should  result  in  increased  earnings  of  a  considerable 
amount  in  the  aggregate. 

Decreasing   Operating   Expense 

The  railroads  for  the  past  few  years — from  1907 
to  1915 — have  practiced  every  possible  economy  in 
the  operation  and  maintenance  of  their  properties. 
Of  the  total  maintenance  of  way  expense,  66%  is 
independent  of  the  volume  of  traffic  carried — repairs 
and  replacements  must  be  made  whether  many  or 
few  trains  are  operated. 

The  decreasing  expenditure  for  maintenance  of 
way  and  structures  of  the  last  few  years  shows  that 
some  of  this  operating  economy  has  been  affected 
by  deferred  maintenance  that  must  be  made  good 
later.  This  is  not  real  economy  at  all,  but  has  been 
forced  on  some  roads  by  radically  decreased  net 
earnings. 

Further  reductions  in  operating  expenses  cannot 
therefore  be  reasonably  expected  under  existing 
conditions,  the  tendency  being  toward  higher  labor 
costs  and,  if  not  higher,  certainly  not  lower  costs 
for  supplies  required  in  railroad  operation  and 
maintenance. 

If  certain  existing  restrictions  on  railroad  opera- 
tion are  removed  there  is  a  feasible  way  of  reducing 
operating  expenses  somewhat. 

Between  all  large  traffic  centers,  as  to  both  freight 
and  passenger  traffic,  there  are  several  competing 


336  VALUATION  AND   RATES 

lines  of  railroads.  In  some  instances  one  system  has 
its  own  line  extending  from  one  to  the  other,  and 
in  others  the  through  line  will  be  operated  jointly 
by  two  or  more  systems  of  railroads. 

j  reen  Chicago  and  New  York  there  are  four 
sytst'  operating  their  own  through  lines  and  many 
joint  iix  ,s,  made  up  by  the  combination  of  two  or 
more  systems.  Between  Chicago  and  St.  Paul-Min- 
neapolis, six  systems  operate  their  own  lines;  be- 
tween Chicago  and  St.  Louis  there  are  five  through 
lines;  and  the  same  is  true  between  all  traffic  cen- 
ters of  much  less  importance  than  these,  all  over 
the  country. 

Operating  Economics  That  Might  Be  Effected 
by  Unified  Ownership 

If  the  six  lines  operated  between  Chicago  and  St. 
Paul  were  all  owned  by  one  company,  the  method 
of  operation  would  be  different,  and  more  eco- 
nomical, than  under  the  present  six  managements. 
The  Chicago,  Burlington  &  Quincy  and  the  Chicago, 
Milwaukee  &  St.  Paul  have  short  lines  and  for  much 
the  greater  part  of  the  way  they  have  water  grades. 
The  Chicago  and  North  Western  has  the  shorter  line 
but  heavier,  though  not  excessive  grades. 

Evidently,  through  freight  traffic  can  be  carried 
at  less  unit  cost  on  the  Chicago,  Burlington  &  Quincy 
and  the  Chicago,  Milwaukee  &  St.  Paul  than  by  the 
other  four  roads.  If  the  through  freight  traffic  were 
concentrated  on  these  two  lines,  practically  all  of 
their  through  freight  trains  would  be  filled  up  to  the 
capacity  of  the  engines,  and  the  whole  through 
freight  traffic  would  be  hauled  in  fewer  trains, 
with  fewer  train  crews,  and  hence  at  less  expense. 

The  same  is  true  as  to  the  passenger  traffic.  Two 
or  three  of  the  lines  would  be  found  able  to  carry 
the  through  passenger  traffic  at  less  cost  than  the 


RATE  REGULATION  337 

others,  and  such  traffic  would  be  diverted  to  them. 
There  would  then  be  two  or  three  through  lines  mov- 
ing through  passenger  trains,  carrying  something 
near  their  capacity,  instead  of  five  lines*,  movir'x 
more  trains,  many  of  which  are  carrying  carr  fy 
partly  filled,  which  is  the  present  conditions  'J'r 
There  is  a  further  advantage  in  such  an  &>  *£nge- 
ment,  in  that  during  periods  of  maximum  traffic 
movements  the  lines  not  ordinarily  employed  for  the 
through  traffic  would  be  utilized  to  move  the  surplus. 
This  would  avoid  the  necessity  of  contructing  addi- 
tional tracks  and  other  facilities  which  would  be 
required  if  one  of  the  lines  secured  more  than  its 
share  of  the  traffic. 

Pooling 

All  of  the  advantages  which  would  accrue  if  the 
six  systems  were  under  one  management  may  be 
realized  if  the  passenger  and  freight  traffic  could  be 
pooled.  This  is  forbidden  by  law  and  is  repugnant 
to  present  public  sentiment,  and  yet  a  little  consid- 
eration will  show  it  to  be  in  the  public  interest,  as 
well  as  that  of  the  railroads. 

Some  abuses  grew  out  of  the  former  money  and 
traffic  pools,  and  they  might  occur  again  unless  such 
arrangements  were  made  under  proper  supervision. 
At  the  time  pooling  was  forbidden  by  law  the  In- 
terstate Commerce  Commission  did  not  have  its  pres- 
ent power  of  supervision  and  regulation. 

Nothing  is  clearer  today  than  that  competition  in 
rates  between  railroads  is  practically  impossible, 
and  not  in  the  interest  of  the  public.  A  long-con- 
tinued and  expensive  experience  has  proven  to  the 
business  interests  of  the  country  that  such  compe- 
tition is  not  desirable  from  their  standpoint.  The 
only  practicable  competition  is  in  service,  and  the 
plan  herein  suggested  could  be  made  to  give  much 

*One  of  the  six  lines  does  not  operate  through  passenger  trains. 


338  VALUATION  AND  RATES 

better  service  than  existing  conditions  admit,  be- 
cause equipment  as  well  as  the  other  facilities  could 
be  pooled. 

Inasmuch  as  the  Interstate  Commerce  Commission 
has,  or  can  be  vested  with,  power  to  regulate  and 
supervise  railroad  pooling  of  freight  and  passenger 
business  to  such  an  extent  that  the  old  abuses  may  be 
prevented,  there  is  no  valid  reason  why  such  an  ar- 
rangement as  here  suggested  should  not  be  made.  It 
would  reduce  somewhat  the  otherwise  necessary  and 
substantial  increases  in  rates  and  improve  the  serv- 
ice, both  of  which  are  substantial  advantages  for 
the  public;  it  would  reduce  the  cost  of  service 
through  more  economical  operating  conditions  and 
utilizing  more  fully  existing  transportation  facilities, 
both  of  which  should  enable  the  railroads  to  in- 
crease somewhat  their  net  earnings. 

It  is  to  be  understood  that  the  pooling  here  sug- 
gested is  not  an  alternative  plan — a  substitute  for 
the  readjustment  of  rates  heretofore  discussed.  The 
argument  is  that  the  necessary  increase  of  rates, 
which  must  be  made  in  any  event,  need  not  be  so 
radical  if  operating  expense  may  be  reduced  some- 
what by  pooling. 

Decreasing   Fixed   Charges 

The  third  method  of  increasing  net  earnings  is 
by  decreasing  fixed  charges.  The  constant  demand 
for  improvements,  all  of  which  are  charged  to  cap- 
ital account,  increases  fixed  railroad  charges.  The 
only  way  that  such  charges  can  be  reduced,  then, 
is  to  reduce  the  rate  of  interest  paid  on  the  funded 
debt  of  the  railroads. 

As  already  shown  as  to  stocks  and  as  current  quo- 
tations on  bonds  show,  the  actual  rate  of  interest 
under  present  conditions  is  much  more  likely  to  in- 
crease than  to  become  less.  The  only  remaining 


RATE  REGULATION  339 

way,  then,  of  reducing  the  rate  of  interest  is  by  in- 
creasing the  security  of  the  bonds,  and  public  own- 
ership of  the  properties  is  the  only  feasible  way 
in  which  that  additional  security  may  be  obtained. 

The  government,  on  its  issue  of  bonds  providing 
for  the  payment  of  the  cost  of  constructing  the 
Panama  Canal,  pays  3%.  The  entire  national  debt, 
however,  exclusive  of  this  issue  is  but  little  more 
than  one  billion  dollars.  If  it  acquired  the  rail- 
roads of  the  country,  its  debt  would  be  increased  by 
between  17  and  20  billion  dollars.  No  country  in 
the  world  at  the  present  time  owes  such  a  debt,  and 
it  could  only  be  conjectural  to  say  what  interest 
would  be  demanded  on  such  a  huge  sum. 

Government  ownership  of  railroads  does  not  nec- 
essarily mean  government  operation  of  them.  Some 
such  plan  as  that  under  which  the  subway  system 
of  rapid  transit  in  New  York  City  is  worked  is  pos- 
sible. The  city  constructs  and  owns  the  subways, 
the  operation  being  conducted  by  an  operating  com- 
pany leasing  the  property  from  the  city. 

The  plan  in  effect  lends  the  credit  of  the  city  in 
constructing  the  transportation  facilities,  but  avoids 
the  necessity  of  municipal  operation  with  its  many 
attendant  evils. 

The  time  may  come  when  this  last  exedient  must 
be  adopted  on  economical  grounds — the  writer  hopes 
most  sincerely  that  it  may  never  come — but  as  be- 
tween government  ownership,  on  the  one  hand,  and 
pooling  in  connection  with  the  readjustment  of  ex- 
isting rates,  on  the  other,  the  latter  is  certainly  less 
objectionable. 

Present  conditions  cannot  continue  indefinitely. 
Some  expedient  for  increasing  net  earnings  must 
be  adopted  within  the  next  few  years  if  our  rail- 
roads are  to  be  economically  maintained,  efficiently 
operated  and  extended  to  properly  develop  the  nat- 
ural resources  of  all  parts  of  the  country. 


OUTLINE 


HISTORICAL  Pages  9-22 

Early  conditions  9— Development  of  steam  railroads  10— Early 
rates  11. 

Development  in  United  States  13 — First  railways  13 — Fundamental 
conditions  14 — Basis  for  financing  15 — Foreign  investments  16 
— Causes  of  increased  construction  18. 

Character  of  Railroads  20 — Military  21 — Political  21 — Commer- 
cial 22. 


PROMOTION  Pages  23-65 

Classification  23  — Time  factor  in  development  24— Investors' 
risk  26 — Charter  27 — Surveys  and  Estimates  30 — Estimating 
Traffic  38. 

Real  Estate  47 — Options  and  franchises  49 — Elements  of  cost  and 
damage  50 — Relative  importance  57. 

Securing  capital  58 — Cost  of  and  Risk  in  promotion  60 — Summary 
63. 


CONSTRUCTION -RECONSTRUCTION  Pages  66-113 

Engineering  66 — Expedients  for  reducing  construction  cost  69. 

Estimates  of  construction  cost  76 — Additions  to  original  cost  76 — 
Contingencies  79. 

Organization  82 — Financial  difficulties  in  early  operation  85. 

Effect  of  combination  on  traffic  density  88 — Effect  of  traffic  density 
on  operating  expense  90. 

Reconstruction  97 — Change  in  character  of  roads  98 — Estimate  of 
cost  107 — Increased  capitalization  107 — Constant  reconstruc- 
tion 109. 

Summary  110. 


CAPITALIZATION         Pages  114-136 

Functions  of  railroads  114 — Stockholders  115 — Early  financing  116. 

Bonds  117 — State  aid  118 — Ratio  of  stocks  and  bonds  119 — Capital- 
ization of  U.  S.  railroads  119. 

Combination  120 — Holding  securities  of  other  roads  122 — Holding 
companies  124. 

Reconstruction  126 — Readjustment  127 — Reorganization  128 — Com- 
missions and  discounts  132. 

Summary  133 — Capitalization  of  50  important  roads  135. 


VALUATION  Pages  137-211 

General   purposes  137 — Capitalization — Valuation — Rates  139. 

Federal  Valuation  Act  142— 

Commission's  reasons  for  demanding  valuation  142 — Securities 
commission  143 — Senate  committee  144 — Duties  of  commis- 
sion 145 — Provisions  of  the  act  146. 

Original  Cost  148. 

Cost  of  Reproduction  New  149 — 

Assumptions  150 — Three  railroad  periods  154. 

Overhead   Charges  156 — Engineering   156 — Contingencies   157 — In- 
terest 158 — Actual  allowances  160. 

Reproduction  New  Less  Depreciation  161. 

Appreciation  163 — Embankments  163 — Excavations  164 — Bal- 
last 165. 

Depreciation  166 — Ties  166 — Rails  167 — Buildings,  structures 
and  equipment  170 — Obsolesence  and  inadequacy  171 — Not 
deductible  from  capital  171 — Treatment  of  depreciation 
172 — Analogy  173 — Importance  of  depreciation  method  176 
— Fallacy  in  deducting  depreciation  176 — Ruinous  effect  on 
railroad  credit  177 — Reasonable  interpretation  of  depre- 
ciation clause  of  act  178 — Necessity  for  depreciation  fund 
questionable  178 — Actual  allowances  179. 

Unit  Prices  182. 

Land  Values  184— 

Original  cost  185 — Present  value  185 — Cost  in  excess  of  pres- 
ent value  186 — Method  of  establishing  present  value  187— 
Necessity  as  to  time  and  location  188 — Adjustment  of  land 
boundaries  190 — Fallacies  in  former  valuations  193 — Adjust- 
ment of  boundaries  essential  to  consideration  of  reproduction 
194 — Fair  basis  for  valuation  of  land  195 — Land  not  used  for 
railroad  purposes  196. 

Intangible  Values  197— 

Good   Will  198— Going   Value  200— Development  Cost   205. 
Miscellaneous  Provisions  of  the  Valuation  Act  207. 
Conclusions  208. 


RATES  Pages  212-318 

Cost  of  Service  212 — 

Capitalization  213 — Relation  of  traffic  to  operating  expense  215 
— I.  C.  C.  tables  218 — Fixed  operating  expense  223 — Operating 
expense  per  traffic  unit  230 — Physical  factors  233 — Terminal 
expense  236 — Apportionment  of  expense  238 — Summary  and 
application  of  principles  240 — Equal  mileage  rates  243. 

Historical  Development  of  Rates  246 — English  246 — American  248 
— Summary  252 — Rate-making  not  a  science  253. 

Importance  of  Cost  Data  254— Analogy  255— Engineers'  method  256 
—Relative  costs  257 — Lack  of  data  257— Commercial,  Legal 
and  Economical  factors  258. 

Value  of  Service  260— Justification  261—1.  C.  C.  argument  262— 
Analogies  264. 

Classification  270. 

Methods  of  Rate- making  271 — Mileage  distance  scales  272 — Per- 
centage and  Differential  method  274. 

Long  and  Short  Haul  Rates  286 — Competition  reduces  value  of 
service  286 — Circuitous  routes  287 — Differences  in  rail  and 
water  transportation  292 — River  competition  293 — Lake  com- 
petition 298 — Ocean  competition  300 — Transcontinental  rates 
300 — Principles  involved  in  transcontinental  rates  312. 

Relation  of  Valuation  to  Rates  314. 
Relation  of  Cost  of  Service  to  Rates  315. 


RATE    REGULATION         Pages  319-339 
Limitation  of  Regulating  Authority  319. 

Fair  Return  on  Value  322 — Not  uniform  322 — Element  of  risk  323 — 
Effect  on  development  of  country  324 — On  A.,  T.  &  St.  P.  326 — 
Unproductive  improvements  326 — Not  possible  to  earn  fair 
return  in  all  cases  327. 

Decreased  price  of  railroad  securities  328 — Increased  operating  ex- 
pense 330 — Decreased  return  on  capital  331 — Margin  between 
profit  and  loss  small  332. 

Three  Methods  of  Increasing  Net  Earnings  333 — Increasing  rates 
333 — Decreasing  operating  expense  335 — Possible  economies 
336 — Pooling  337 — Decreasing  fixed  charges  338. 


THIS  BOOK  IS  DUE  ON  THE  LAST  DATE 
STAMPED  BELOW 


AN     INITIAL    FINE    OF    25    CENTS 

WILL  BE  ASSESSED  FOR  FAILURE  TO  RETURN 
THIS  BOOK  ON  THE  DATE  DUE.  THE  PENALTY 
WILL  INCREASE  TO  SO  CENTS  ON  THE  FOURTH 
DAY  AND  TO  $1.OO  ON  THE  SEVENTH  DAY 
OVERDUE. 


2 


$59 


LD  21-50m-l.'3 


UNIVERSITY  OF  CALIFORNIA  LIBRARY 


